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FEB  5      1935 

WAR  1 5  193f 
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>/AiV  6      tgj^ 

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TEB  4      19?P 
JAN     3  193tf 

WAR  13  193S 
APR  4    1345 

IftAR  2  8 1946 


JUL  I  0  REQJ 


KIX'O 


OUTLINES  OF  KCONOMICS 


THE    UNIVERSITY   OF  CHICAGO  PRESS 
CHICAGO,   ILLINOIS 

Hgents 

THE  BAKER  &  TAYLOR  COMPANY 

NEW    YORK 


THE    CAMBRIDGE    UNIVERSITY    PRESS 

LONDON    AND     EDINBURGH 


OUTLINES    OF    ECONOMICS 

DEVELOPED  IN  A  SERIES 
OF  PROBLEMS 


BY  MEMBERS 

OF  THE  DEPARTMENT  OF  POLITICAL  ECONOMY 

OF  THE  UNIVERSITY  OF  CHICAGO 


,  .  * »    -  ^  o    ; ,  -         '     '   -    '        •  ■>         .  ^  • 


THE  UNIVERSITY  OF  CHICAGO   PRESS 
CHICAGO,  ILLINOIS 


59231 


Copyright  1910  By 
The  University  of  Chicago 


All  Rights  Reserved 


Published  September  1910 

Second  Imijression  February  1911 

Second  Edition  September  1911 


Composed  and  Printed  By 

The  University  of  Chicago  Press 

Chicago,  Illinois,  U.S.A. 


44- ti 


^  PREFATORY    NOTE 

.  This  book,  which  has  been  revised,  expanded,  and  to  a  consider- 
able  extent  rewritten  since  its  first  publication  in  tentative  form  a 

^  year  ago,  is  the  outgrowth  of  a  three  years'  experiment  in  elementary 

'  economic  instruction.  The  problem  with  which  this  experiment  has 
had  to  do  is  sufficiently  familiar  to  teachers  of  introductory  economics: 
the  problem  of  imparting  the  essentials  of  economic  theory  to  college 
students  who,  at  the  same  time  that  they  condemn  such  generaliza- 
tions as  remote  and  unpractical,  betray  in  many  ways  how  limited 
is  their  own  understanding  of  practical,  commonplace,  economic 
facts.  Fortunately,  it  is  possible  not  only  to  link  economic  theory 
with  descriptive  material,  but  in  a  measure  to  build  the  theory  up 
out  of  the  famihar  events  of  economic  life.  This  procedure  the 
authors  have  attempted  to  embody  in  a  series  of  problems  designed 
to  guide  the  student  in  his  reading  and  to  give  definiteness  and  direc- 
tion to  classroom  discussion. 

The  method  of  the  book  has  been  called  inductive;  but  it  is  induc- 
tive in  only  a  very  limited  sense.  Questions  and  answers  could  hardly 
enable  beginners  in  the  subject  to  arrive  independently  at  the  con- 
clusions which  economic  scholars  have  accepted.  The  instructor 
must  still  hold  the  discussion  to  a  true  course.     Yet  questions  can 

.  and,  as  experience  shows,  do  serve  to  arouse  interest,  to  point  the 
way  in  which  a  sound  conclusion  lies,  and  to  give  a  basis  for  discrimi- 
nating and  independent  judgment  respecting  the  adequacy  of  the  con- 
clusion which,  under  guidance,  is  reached.  A  student  is  well  on  his 
way  to  understand  the  fundamentals  of  economics  so  soon  as  he  learns 
to  reflect  intelligently  upon  what  is  hai)pening  every  day  in  the  world 
of  affairs  about  him. 

It  is  not  intended  that  the  Outlines  shall  lake  the  place  of  a  text- 
book. Rather  they  have  been  designed  to  })arallel  some  text,  with 
its  systematic  presentation  of  economic  theory,  and  they  may  well 
be  further  supplemented  by  readings  of  a  descriptive  character. 
A  "case-book"  of  illustrative  material  is  already  in  preparation  for 
use  with  the  Outlines. 


VI  OUTLINES   OF  ECONOMICS 

The  authors  have  been  aided  both  in  the  writing  of  the  book 
and  in  the  experimenting  which  led  to  it,  by  co-operation,  criticism 
and  suggestions  from  many  teachers  of  economics  in  their  own  Uni- 
versity and  in  other  institutions.  In  particular  they  wish  gratefully 
to  acknowledge  the  assistance  rendered  by  Professor  J.  Laurence 
Laughlin,  Professor  A.  S.  Johnson,  and  Professor  R.  F.  Hoxie,  of  the 
University  of  Chicago;  Professor  F.  M.  Taylor,  of  the  University 
of  Michigan;  Professor  A.  B.  Wolfe,  of  Oberlin  College;  and  Professor 
T.  N.  Carver,  of  Harvard  LTniA-ersity. 

Leon  C.  Marshall 
Chester  W.  Wright 
James  A.  Field 


CONTENTS 


A.  Introductory i 

B.  Economic  Wants,  Motives,  and  Choices        ....  3 

I.   The  Characteristics  of  Wants 3 

II.  Means  of  Satisfying  Wants 4 

C.  Preliminary  Survey  of  the  Economic  System         ...  7 

I.  The  Evolution  of  Industrial  Society     ...  7 

II.   Certain   Characteristics    of    the    Present    Eco- 
nomic System 9 

1.  Private  Property .10 

2.  Freedom  of  Competition 10 

3.  Co-operation  through  Exchange  of  Goods  11 

4.  The  Money  Economy 12 

D.  The  Productive  Process 14 

I.   The  Meaning  of  Production 14 

II.  Natural  Agents  and  the  Productive  Process   .  15 

1.  The  Function  of  Natural  Agents  in  tlie  Productive 
Process 16 

2.  The  Increase  ol  Pr(Kkiclion  as  Determined  ijy  Land  16 

a)  Physical  Limitation  of  Land 

b)  Exhaustion  of  the  Powers  of  Land 

c)  The  Law  of  Return 

3.  The  Conservation  of  Natural  Resources  .  17 

III.  Labor  and  the  Productive  Process  19 

1.  The  Definition  of  Labor 19 

2.  The  Elements  of  the  Labor  Power  of  a  Community  19 
a)  The  Number  of  Laborers  (see  tlu'  topic  "In- 
crease of  Population  ""  below) 

vii 


VI 1! 


OUTLINES   OF  ECONOMICS 


b)  The  Efficiency  of  Each  Individual 

i.  Health  and  Strength 

ii.  Mental  Qualities 
iii.  Moral  Qualities 
iv.  Social  Conditions 

c)  Time  of  Labor 

d)  Division  of  Labor  (treated  under  "Organiza- 
tion") 

3.  The  Conservation  of  Human  Energy 

4.  The  Increase  of  Population 

a)  Natural  Increase     .... 
i.  The  Problem  of  Numbers 

ii.  The  Problem  of  Quality   . 

b)  Immigration 

IV.   Capital  and  the  Productive  Process 

1.  The  Definition  and  Function  of  Capital 

2.  The  Accumulation  and  Conservation  of  Capital 

V.   Organization  and  the  Productive  Process 

1.  Specialization 

a)  Specialization  in  Relation  to  Exchange 

b)  The  Separation  of  Occupations 

c)  The  Division  of  Labor 

d)  Territorial  or  Geographical  Specialization 

i.  Grouping  of  Related  Industries 
ii.  Grouping  of  Many  Plants  of  the  Same  In- 
dustry 

e)  Factors  Limiting  the  Degree  of  Specialization 

i.  The  Nature  of  the  Industry 

ii.  The  Extent  of  the  Market 
iii.  Social  Institutions 
iv.  Financial  Organization 

2.  Ths   Economic  Proportioning  of   the  Productive 
Factors 


PAGE 


20 

22 

22 
22 

23 
24 

25 

25 
26 

27 
28 


29 


CONTENTS  ix 

PAGE 

3.  Present  Forms  of  Industrial  Organization  30 

a)  Forms  of  Business  Organization  ...  30 

i.  The  Individual  Firm 
ii.  The  Partnershij) 
iii.  The  Corporation 

iv.  Co-operative     Enterprise     (treated     under 
"Social  Reform") 

b)  The  Size  of  the  Most  Efficient  Unit   .        .        .  31 

4..  Modern  Organization  Exemplified  by  Certain  In- 
dustries    32 

a)  Agriculture 32 

b)  Transportation 34 

i.  Transportation  in  General        ....  34 

ii.  Railroad  Transportation 35 

(a)  The   Development   of   Railroad   Trans- 
portation        35 

(b)  Characteristics  of  the  Railroad  Industry  35 

(c)  Railroad  Rates 36 

c)  Manufactures:  Large-Scale  Industry  —  the 
Trusts 38 

i.  The  Origin  of  the  Trust  Problem  ...  39 
ii.  The  Trust  Movement  in  the  United  States  .  40 
iii.  The  Promotion  and  Organization  of  a  Trust  40 
iv.  Analysis  of  the  Causes  of  the  Growth  of 
Trusts  and  the  Results  of  the  Trust  Organi- 
zation            41 

V.  The  Lines  of  Procedure  in  Dealing  with  the 

Trust  Problem 42 

Exchange 44 

I.    Markets 44 

II.   Value 45 

1.  The  Nature  of  Value  and  Price          ....  45 

2.  Demand  and  Supply  in  Relation  to  \'alue  46 

3.  Normal  Value  and  Normal  Price       ....  48 


OUTLINES   OF  ECONOMICS 


PAGE 


O 


52 

S3 
53 

54 


4.  Analysis  of  Demand 49 

a)  Meaning  of  Demand 49 

b)  Determinaiits  of  Demand 49 

i.  Desire 

(i)  Individual  Determinants  of  Desire  50 

(2)  Social  Determinants  of  Desire  50 

ii.  Effectiveness  of  Desire — Purchasing  Ability       51 

iii.  Persons  Affected 

c)  Certain  Characteristics  and  Special  Forms  of 
Demand 

i.  Elasticity  of  Demand 53 

ii.  Alternative  Demand:  The  Principle  of  Sub- 
stitution       

iii.  Derived  Demand 54 

iv.  Composite  Demand 55 

v.  Joint  Demand   .  ■        •        •       55 

5.  Analysis  of  Supply 56 

a)  Meaning  of  Supply 56 

b)  Determinants  of  Supply 56 

i.  Cost  of  Production,  Simphfied  Treatment  .       56 
(i)  Uniform   Cost   per    Unit    of    Product: 

"  Constant  Cost " 57 

(2)  Different  Costs  for  Different  Units  of 

Product 58 

(a)  "Increasing  Cost" 
{b)  "  Diminishing  Cost " 
ii.  Indeterminate  Cost  of  Production  59 

(i)  Direct  Cost  and  Indirect  Cost  59 

(2)  Joint  Cost 60 

(3)  Effects  of  Progress  in  Methods  of  Pro- 
duction         

(4)  Appreciation  and  Depreciation 
iii.  Physical  Limitation  of  Supply 
iv.  Monopolistic  Limitation  of  Supply 

V.  Social  Determinants  of  Supply 
(i)  Formal  Social  Control 
(2)  Informal  Social  Control 


60 
61 
61 
62 

63 


CONTENTS  xi 

PAGE 

c)  Certain    Special    Forms    or    Manifestations    of 

Supply 64 

i.  Perishable  Goods 64 

ii.  Joint  Supply  and  By-Products       ...  64 

iii.  Composite  Supply 65 

6.  The  Marginal  Utihty  Explanation  of  Value            .  65 

7.  General  Questions  on  Value 66 

III.   The  Mechanism  of  Exchange 69 

1.  Money  Exchange 69 

a)  The  Nature  and  Functions  of  Money  69 

b)  The  Characteristics  of  a  Satisfactory  Money 
Good 70 

c)  The  Forms  of  Money 71 

i.  Standard  Money 
ii.  Token  and  Subsidiary  Currency 
iii.  Credit  Money 

d)  The  Value  of  Money 72 

i.  The  Value  of  Standard  Money      ...  72 

ii.  The  Value  of  Other  Forms  of  Money  74 

e)  Gresham's  Law 74 

/)  The  Kinds  of  Standard 75 

i.  The  Single  Standard  (monometallism)  75 

ii.  The  Double  Standard  (bimetallism)  75 

iii.  The  Limping  Standard 77 

iv.  The  Tabular  Standard  and  the  Method  of 

Index  Numbers 77 

V.  The  Paper  Standard  (iial  money)  78 

2.  Credit  Exchange 78 

a)  Credit  and  Credit  Instruments     ....  78 

b)  Credit  Institutions   (with  particular  reference 

to  banking) 79 

i.  Principles  of  Banking 79 

ii.  Clearing-House  Operations     ....  81 

iii.  Comparison  of  Banking  Systems  .  82 
iv.  Foreign  Exchange  (treated  under  "  Interna- 
'   tional  Trade'') 


XII  OUTLINES   OF   ECONOMICS 

PAGE 

IV.   International  Trade 83 

1.  The  Principles  Determining  International  Trade  84 

a)  Trade  Based  upon  Insuperable  Differences  of 
Economic  Conditions 

b)  Trade  Based  upon  Differences  Constituting  Re- 
ciprocal Superiority 

c)  Trade    Based    upon    Differences    Constituting 
Relative  Superiority 

2.  The  Balance-of-Trade  Idea 86 

3.  Foreign  Exchange  and  International  Payments  87 

4.  Regulation  of  International  Trade  (with  particular 
reference  to  the  protective  tariff)       ....        88 


F.     The  Distributive  Process 
I.   Introductory   . 
II.   Rent    . 

I.  Introductory 


91 
91 

93 

93 


2.  The  Differential  Return  (without  necessary  refer- 
ence to  any  particular  system  of  ownership)  .        .  93 

3.  The  Relation  of  Economic  Rent  to  Contract  Rent 
under  a  Regime  of  Private  Property         ...  96 

4.  Rent  and  Cost  of  Production 97 

5.  Rent  in  Relation  to  Taxation 98 

6.  Rent  and  Social  Reform 98 

7.  Economic  Phenomena  Analogous  to  Rent       .  99 

III.   Wages  and  Trade  Unionism  100 

1.  The  Demand  for  Labor       .  .        .        ;        .100 

2.  The  Supply  of  Labor loi 

3.  Some  Practical  Apphcations  of  the  Principle  of 
Demand  and  Supply  to  the  Subject  of  Wages  102 

4.  The  Specific  Productivity  Theory  of  Wages  .104 

5.  Trade  Unionism 106 

a)  Causes  of  Trade  Unionism 106 

b)  Trade  Union  Organization  and  Demands  .  107 


CONTENTS 


Xlll 


c)  Trade  Union  Theory 

d)  Trade  Union  Policies  and  Methods 

e)  The  Social  Problem  of  Unionism 


IV.   Interest    

1.  Introductory  .... 

2.  The  Demand  for  Capital 

a)  The  Demand  for  Capital  Goods 

b)  The  Demand  for  Funds 

i.  Long-Run  Demand  . 
ii.  Mom.entary  Market  Demand 

3.  The  Supply  of  Capital 

a)  The  Supply  of  Capital  Goods 

b)  The  Supply  of  Funds 

i.  Long-Run  Supjjly 

(i)  The  Savable  Surplus 
(2)  The  Motives  to  Saving 

ii.  Momentary  Market  Supply 

4.  General  Questions  on  Interest    . 

V.   Profits 

1.  Introductory         .... 

2.  The  Risks  of  Industry 

a)  The  Nature  of  Industrial  Risks 

b)  Si)eculation  in  Relation  to  Risks 

c)  Insurance  in  Relation  to  Risks 

3.  General  Questions  on  Profits 


PAGE 
107 
108 
109 

IIO 

no 

112 
112 
112 
112 

114 
114 
114 
I.I4 


116 
117 

118 
118 
119 
119 
120 

124 


Public  Finance  and  Taxation    . 
I.   The  Forms  of  Public  Expenditure 

II.   The  Sources  of  Public  Revenue 

1.  Public  Loans 

2.  Public  Domain 

3.  Public  Industries  and  Investments 

4.  Fees  and  Assessments    . 


1 26 
126 

126 

126 
128 
1 28 
128 


XIV 


OUTLINES   OF  ECONOMICS 


PAGE 

129 

129 

130 

T 

130 

131 

131 

132 

132 

133 

133 

134 

134 

^ 

135 

Order 

13s 

5.  Taxation 

a)  Canons  of  Taxation 

i.  The  Principle  of  Benefit    . 
ii.  The  Principle  of  Ability  or  Faculty 

b)  Forms  and  Incidence  of  Taxation 

i.  The  General  Property  Tax 
ii.  Customs  Duties 
iii.  Excise  Taxes        .        .        . 
iv.  Income  Taxes      .... 
V.  Inheritance  Taxes 
vi.  Corporation  and  Business  Taxes 

c)  Tax  Reform 

H.     Social  Reform 

I.   Criticisms  or  the  Present  Industrial  Order 

1.  Economic  Defects 

a)  Defects  of  the  Productive  Process 

i.  Wastefulness  and  Duplication  of  Effort 
ii.  Artificial  Stimulation  of  Wants 
iii.  Production  for  Sale  Rather  Than  for  Service 
iv.  Carelessness  in  Conserving  Human  Energy 

b)  Defects  of  the  Distributive  Process 

i.  Great  Inequalities  in  Possessions  and  Incomes 
ii.  The  Unfortunate  Situation  of  the  So-called 

Lower  Classes 
iii.  The  Consequences 

2.  Resulting  Social  and  Political  Defects 

a)  Corruption,    Favoritism,    and    Inefficiency    in 
Government 

b)  Militarism 

c)  Vice  and  Crime 

3.  Difificulty    (impossibility?)    of   Remedying   These 
Evils  under  the  Present  System 

Remedies  Which  Have  Been  Suggested  . 
I.  Individual  Reform — the  Development  of  Different 
Ideals 


II. 


137 


137 


CONTENTS  XV 

PAGE 

a)  The  Significance  of  Individual  Reform 

b)  The  Agencies  of  Individual  Reform 

Social  Reform 138 

a)  Reforms   Involving   No   Vital   Change   in   the 

Present  Order 138 

i.  Reforms  of  the  Immediate  Conditions  of  In- 
dustry 

(i)  On  the  Initiative  of  the  Persons  to  Be 
Benefited 

(a)  The  Trade  Union  Mo\'ement 

(b)  Co-operative  Enterprises 

(2)  On  the  Initiative  of  Other  Persons 
(a)  Profit-sharing 

(3)  On  the  Initiative  of  the  State 

(a)  Regulation  of  the  Conditions  of  Work 

(b)  Workingmen's   Insurance   and   Pen- 
sions 

ii.  General  Economic  and  Social  Reforms 
(i)  On  the  Initiative  of  Private  Persons 
(a)  Philanthropic  and  Charitable  Enter- 
prises 
(2)  On  the  Initiative  of  the  State 

(a)  Direct  Aid  to  the  Needy — Poor-Re- 
lief 

(b)  Tax  Reforms 

(c)  Enlarged  Educational  Facilities 

(d)  Provisions  for  the  Public  Health 

b)  Reforms  Practically  Amounting  to  Revolution       140 

i.  Land    Nationalization    (dealt    with    under 

''Rent") 
ii.  Anarchism 
iii.  Communism 
iv.  Socialism 

(i)  The  Sociahst  Philosophy  as  Exemplified 
in 
(o)  Utopian  Socialism 


xvi  OUTLINES   OF  ECONOMICS 

(b)  Christian  Socialism 

(c)  State  Socialism 

(d)  Marxian  Socialism 

(i)  The  Materialistic  Conception  of 

History 
(ii)  The   Marxian  Theory  of   Ex- 
ploitation 
(iii)  The   Doctrine    of    Capitalistic 

Contradictions 
(iv)  The    Class    Struggle    and    the 

Social  Revolution 
(v)  The     Co-operative     Common- 
wealth 
(2)  The  Socialist  Movement 

(a)  The  Socialist  Program 

(b)  The  Organization  and  Extent  of  the 
Movement 

(c)  The  Aids  and  Hindrances  to  the 
Movement 

III.   Suggested  Ideals  of  Distributi\^e  Justice  .       .     142 

1.  The  Aristocratic  Ideal 

2.  The  Communistic  Ideal 

3.  The  Socialistic  Ideal 

4.  The  Competitive  Ideal 


A.  INTRODUCTORY 

Economics  is  the  scientific  study  of  the  activities  of  men  in  the 
process  of  getting  a  living.  As  such,  it  is  one  of  the  social  sciences; 
for  the  methods  by  which  men  attempt  to  make  a  Hving  depend  on 
the  way  in  which  men  live  together  in  society.  All  modern  business 
involves  a  high  degree  of  co-operation,  and  is  to  that  extent  social  in 
character.  Certain  industries  and  trades  are  possible  only  under  special 
social  conditions:  elevated  railways  and  subways  do  not  pay  except 
in  large  cities;  shopkeepers  can  sell  only  those  goods  which  conform 
to  the  fashion  and  usage  of  the  day;  saloons  and  lotteries  are  subject 
to  the  public  sense  of  right  and  wrong,  expressed  in  law.  To  differ- 
entiate economics  sharply  from  the  other  social  sciences  would  in 
fact  be  impossible.  Each  of  these  social  sciences,  investigating  its 
own  special  problems,  is,  in  its  attempt  to  explain  them,  driven  to 
study  the  forces  now  operating  in  society  as  a  whole.  All  the  social 
sciences  deal  with  the  process,  the  evolution,  of  society;  recognize  its 
momentary  aspect  as  but  one  phase  of  a  continuous  change ;  and  seek 
in  the  past  history  of  social  institutions  an  indication  of  the  forms 
they  may  be  expected  to  assume  in  the  future.  In  so  far  as  separate 
social  sciences  are  to  be  distinguished,  the  distinction  is  not  in  fixed, 
exclusive  boundaries,  but  rather  in  a  difference  of  emphasis  and 
viewix)int.  Working  within  the  common  field  of  organized  social 
relations,  each  science  treats  primarily  and  centrally  a  problem 
characteristically  its  own. 

The  economist,  in  studying  the  process  of  getting  a  Hving,  is 
I)rimarily  interested  in  the  manner  in  which  men  endeavor  to  satisfy 
their  wants — typically,  though  not  exclusively,  the  material  wants,  of 
food,  clothing,  and  other  necessary  or  desira])le  commodities  that  we 
make,  and  sell,  and  buy,  and  use.  Consequently,  in  what  follows  we 
shall  study  (i)  the  nature  of  wants  and  the  a])plicati()n  of  go(Kls  to 
their  satisfaction  (generally  called  consumption) ;  (2)  the  ])ringing  into 
existence  of  the  means  of  satisfying  wants  (generally  called  produc- 
tion) ;  (3)  the  valuation  set  upon  goods  in  the  process  of  exchanging 
them  (generally  called  exchange);  and  (4)  the  apportionment  or  shar- 
ing of  these  goods  among  the  members  of  society  (generally  called 
distribution).  Of  course  some  wants  are  satisfied  without  effort  on 
our  part,  e.g.,  our  want  for  air.  As  such  cases  present  no  problem, 
the  economist  does  not  concern  himself  with  them.  In  most  cases, 
liowever,  nature  does  not  spontaneously  satisfy  our  wants,  and  this 
one  commonplace  fact  goes  far  to  exi)lain  all  human  social  activity. 


2  OUTLINES   OF  ECONOMICS 

Questions 

1 .  What  do  you  consider  the  ten  most  important  questions  of  the 
day?  Which  of  these  are  essentially  economic  questions?  How 
many  directly  or  indirectly  involve  economic  matters  ? 

2.  Name  some  of  the  laws  passed  by  our  legislatures  that  have 
economic  consequences.  Can  you  mention  any  important  legisla- 
tion that  is  without  economic  effect  ? 

3.  Try  to  estimate  how  large  a  portion  of  our  life  is  given  over  to 
the  attempt  to  satisfy  economic  wants. 

4.  "To  attain  better  satisfaction  of  our  wants  we  might  do  several 
things:  (a)  diminish  the  number  of  our  wants;  (b)  change  the  char- 
acter of  our  wants,  e.g.,  develop  altruism;  (c)  provide  for  larger  pro- 
duction and  better  distribution  of  wealth."  Are  any  of  these  being 
done  today  ?     What  part  of  the  problem  falls  to  the  economist  ? 

5.  What  social  problem  primarily  interests  the  student  of  political 
science  ?  of  history  ?  of  ethics  ?  of  social  psychology  ?  How  is  each 
of  these  problems  related  to  the  central  problem  of  economics  ? 

6.  If  men  were  never  in  danger  of  hunger  or  other  pressing  want 
would  they  work,  or  steal,  or  go  to  war  ?  Are  work,  and  crime,  and 
war  economic  phenomena  ? 

7.  Would  far-reaching  economic  changes,  such  as  the  change  from 
good  times  to  hard  times,  be  Hkely  to  have  political  consequences? 
Would  such  changes  be  likely  to  affect  the  average  man's  attitude 
toward  life  ? 

8.  Do  you  believe  that  you  can  form  a  satisfactory  judgment  upon 
a  given  historical  period,  e.g.,  the  colonial  period  in  America,  without 
having  a  knowledge  of  the  economic  conditions  of  the  time  ? 


B.     IXONOMIC  WANTS,  MOTIVES,  AND  CHOICES 

I.     The  Characteristics  of  "Wants 
II.     Means  of  Satisfying  Wants 

This  phase  of  economics  is  commonly  known  as  The  Consumption 
of  Wealth,  or,  more  briefly.  Consumption. 

I.  The  Characteristics  of  Wants 

Since  political  economy  is  concerned  with  the  effort  to  satisfy 
wants,  some  idea  must  be  gained  of  the  characteristics  of  wants, 
motives,  and  choices.  This  section  of  the  work  is,  of  course,  largely 
a  discussion  of  social  psychology.  Our  main  concern  is  with  the  con- 
sequences of  this  psychology  in  so  far  as  these  consequences  are 
economic. 

Questions 

1.  Try  to  draw  up  a  classified  list  of  our  wants.  Are  they  confined 
to  things  which  enter  into  commerce  ?  Are  they  confined  to  material 
things  ? 

2.  In  the  case  of  most  of  our  wants  it  is  said  that  a  "law  of  dimin- 
ishing utility"  or  "law  of  satiety"  applies. 

a)  State  this  law,  gix'ing  particular  attention  to  a  formulation 
of  the  conditions  under  which  it  is  true. 

b)  What  practical  results  of  the  working  of  this  law  appear  in 
the  industrial  world  ? 

3.  It  is  said  that  "the  sum  total  of  human  wants  cannot  be 
sated." 

a)  What  evidence  can  you  advance  concerning  the  validity  of 
this  statement  ? 

b)  What  practical  results  of  the  working  of  this  law  appear  in 
the  industrial  world  ? 

4.  It  is  said  that  "wants  arc  (K'Urmiiu'd  largi'ly  by  social 
standards." 

a)  What  evidence  can  you  advance  concerning  the  validity  of 
this  statement  ? 

b)  What  practical  results  of  the  working  of  this  law  appear  in 
the  industrial  world  ? 

5.  Are  our  wants  wholly  under  the  control  of  our  reason  ?  Do 
we  always  desire  those  things  which  are  l)eneficial  ?  Worthy  ?  Can 
you  give  cases  where  wants  seem  to  flow  from  llie  action  of  habit? 
custom  ?   social  inheritance  ?   instinct  ? 


4  OUTLINES   OF   ECONOMICS 

6.  Do  pi'()])lL-  actually  apportion  their  expenditures  for  the  articles 
they  buy  in  accordance  with  their  abstract  opinions  of  what  would  be 
judicious  expenditure  ? 

7.  Since  you  must  make  choices,  you  probably  seek  first  to  gratify 
your  most  pressing  desire,  x.  Can  you  tell  why  x  is  at  the  moment 
the  most  pressing  of  your  desires  ?     Would  it  always  be  ? 

8.  Suppose  you  had  $100  to  spend.  Would  you  spend  all  of 
it  at  once  ?  What  would  you  buy  ?  Would  you  buy  the  same  things 
at  all  times  and  under  all  circumstances? 

9.  If  you  had  $200  to  spend,  would  you  include  among  your 
purchases  all  the  things  you  would  have  bought  for  $100  ? 

10.  A  spends  annually  $600.  B  spends  annually  $60,000.  Is  it 
likely  that  B  spends  just  100  times  as  much  for  clothing  as  A  does  ? 
Following  out  this  suggestion,  classify  the  expenditures  of  the  ordinary 
family  under  half  a  dozen  general  heads  and  indicate  what  proportion 
of  the  total  expenditure  might  fall  under  each  of  these  heads  in  the 
cases  of  A  and  of  B. 

11.  Make  a  list  of  reasons  why  men  engage  in  industry  and  trade. 
Are  they  ever  actuated  by  altruism,  love  of  power,  or  patriotic  desire 
to  contribute  to  the  welfare  of  their  own  community?  Should  the 
economist  deal  with  such  motives  as  these  ? 

12.  Should  the  economist  deal  with  "economic  wants,  motives, 
and  choices,"  or  with  all  wants,  motives,  and  choices  which  have 
economic  significance  ?  Is  economics  the  only  science  which  is  con- 
cerned with  human  wants  ? 

13.  Do  you  think  of  any  form  of  economic  activity  which  is  not 
consciously  directed  toward  the  satisfaction  of  wants  ? 

XL  Means  of  Satisfying  Wants 

Means  of  satisfying  wants  are  called  goods.  Goods,  which  may  be 
material  or  non-material,  are  characterized  by  the  quality  of  utility — 
the  capacity  to  satisfy  wants. 

The  following  diagram  suggests  a  descriptive  classification  of 
goods : 

/  Material  (wealth) 

(Economic  Goods 
(have  utility,  are  scarce   i 
and  appropriable)  \  Non-Material  (services) 

ivj  cans  01  saiisiymg   / 

Wants-Goods        \  /Material  . 

\    „       ^      ,  \  I  [The  economist  does 

\  Free  Goods  ^^^  ^^^^^^^  ,^j^_ 

(haveutdity)  .^      self  with  these] 

\  Non-Material 


ECONOMIC   WANTS,   MOTIVES,   AND    CHOICES  5 

Questions 

1 .  Does  every  good  possess  utility  ?  Is  everything  which  possesses 
utility  a  good  ? 

2.  Have  the  following  utility:  whiskey,  a  gambler's  pack  of  cards, 
clothes  of  an  obsolete  fashion,  opium,  grand  opera,  air? 

3.  Which  has  the  greater  utility,  a  diamond  or  a  barrel  of  Hour? 
an  uncut  copy  of  a  rare  book  or  a  copy  that  has  its  leaves  cut  and  may 
be  read  ?     Why  ? 

4.  Are  the  following  appropriable:  (a)  a  loaf  of  bread;  (b)  a  coal 
mine;  (c)  sunshine;  (d)  the  Mississippi  river;  (e)  a  public  park;  (/)  a 
band-concert  ?     What  is  meant  by  " appropriable"  ? 

5.  Give  examples  of  non-material  economic  goods,  of  non-material 
free  goods,  and  of  material  free  goods. 

6.  Should  the  economist  be  as  much  concerned  with  non-material 
as  with  material  economic  goods?  Can  we  say  that  one  class  is 
more  important  than  the  other  ? 

7.  Make  a  list  of  things  which  are  clearly  wealth. 

8.  Make  a  list  of 'things  which  are  clearly  not  wealth. 

9.  Make  a  list  of  things  concerning  which  you  are  in  doubt 
whether  they  are  wealth. 

10.  Define  wealth. 

11.  Are  the  following  wealth:  an  ocean  steamship;  a  pleasure 
yacht;  a  ship  on  the  bottom  of  the  ocean ;  gold  in  the  mine;  gold,  to  a 
shipwrecked  sailor  on  a  desert  island;  a  wooden  leg;  health;  eyesight; 
a  waterfall;   a  head  full  of  useful  knowledge;   water? 

12.  "A  thing  may  be  wealth  though  it  is  not  useful,  e.g.,  an  Indian 
arrowhead."     Comment. 

13.  Is  an  encyclopedia  wealth  ?   among  Indians  ? 

14.  Could  a  thing  that  was  wealth  at  one  lime  cease  to  be  wealth 
at  some  other  time  ?     Could  the  reverse  be  true  ?     Why  ? 

15.  If  a  coat  should  go  out  of  style  would  it  still  be  wealth  ? 

16.  What  distinguishes  wealth  from  services? 

17.  Should  we  consider  services  which  have  a  tangible  result  more 
important  than  those  which  do  not  ?  Give  several  illustrations  of 
each  kind. 

icS.  From  the  point  of  view  of  the  cconoinisl  could  you  accept 
as  a  definition  of  wealth — 

a)  Means  of  satisfying  wants  ? 

b)  Things  which  make  for  welfare? 

c)  Material  means  of  satisfying  wants  ? 

d)  Material  things  upon  which  labor  has  been  expended? 

19.  Are  the  following  wealth:  a  court-house;  a  warship;  a  city 
hall;   a  public  library  ? 


6  OUTLINES   OF   ECONOMICS 

20.  How  do  you  distinguish  between  social  wealth  and  i^rivate 
wealth  ?     Does  social  wealth  include  more  than  private  wealth  ? 

21.  When  a  United  States  gold  certificate  is  destroyed  is  wealth 
destroyed  ? 

22.  Is  a  railroad  bond  wealth?  Is  a  patented  invention  ?  afire- 
insurance  policy  ? 

23.  Suppose  a  new  source  of  mechanical  power  should  become 
available  at  one-fourth  the  cost  of  steam-power.  What  would  be  the 
effect  on  wealth  in  general  ?  Would  any  indi\aduals  be  made  less 
wealthy  by  the  new  discovery  ? 

24.  If  wealth  increases  will  there  be  greater  well-being?  What 
is  the  relation  of  wealth  to  well-being  ? 

25.  "To  be  wealth  a  thing  must  be  scarce."  Is  that  equivalent 
to  saying  that  the  less  we  have  of  things  the  better  off  we  are  ?  What 
do  you  mean  by  "scarce"  ? 

26.  Is  a  man's  wealth  measured  by  the  number,  or  bulk,  or  weight 
of  his  possessions,  or  by  their  money  value  ?  Is  a  scarce  article  Ukely 
to  command  a  higher  price  than  one  that  is  common  ?  Does  this 
imply  that  wealth  is  increased  by  scarcity  of  goods  ? 

27.  Should  you  accept  as  true  the  statement  that  the  scarcity  of 
certain  desirable  articles,  such  as  jewxls,  may  enhance  the  comparative 
wealth  of  an  individual,  but  that  general  welfare  is  promoted  by 
abundance  of  the  commodities  which  people  desire  ?     Why  ? 


C.    PRELIMINARY  SURVEY  OF  THE  ECONOMIC  SYSTEM 

I.     The  Evolution  of  Industrial  Society 
II.     Certain  Characteristics  of  the  Present  Economic  System 


A  view  of  a  machine  as  a  whole  aids  in  understanding  the  functions 
of  the  parts.  A  brief  general  survey  of  the  modern  industrial  system, 
showing  how  it  originated,  how  it  developed,  and  what  are  some  of 
its  salient  features  at  the  present  time,  is  likely  to  be  a  useful  prelimi- 
nary to  the  later  detailed  study  of  its  operations. 

I.  The  Evolution  of  Industrial  Society 

Continuous  change  goes  on  in  industrial  society.  The  economic 
organization  which  prevails  in  the  United  States  at  the  present  time 
is  in  many  essentials  very  ditferent  from  that  which  prevailed  in  the 
early  colonial  days  or  at  the  outbreak  of  the  Revolution,  or  even  fifty 
years  ago.  Fifty  years  from  now  it  may  be  very  different  from  what 
it  is  today.  The  changes  are  the  result  of  many  and  complex 
factors  such  as  natural  forces  and  conditions,  human  effort,  social 
institutions,  etc.  Always  the  economic  motive  is  prominent — the 
desire  to  devise  better  methods  of  enabling  us  to  satisfy  our  economic 
wants. 

As  industry  has  developed  from  the  earlier  forms  to  the  present 
form  there  has  constantly  been  a  tendency  toward  specialization. 
Occupations  have  become  differentiated,  division  of  labor  has  in- 
creased. i)roducti\-e  ])rocesses  have  become  more  efficient  as  well  as 
more  complex,  and  the  time  which  elapses  between  the  beginning  of 
the  production  of  a  good  and  the  consumption  of  that  good  has  been 
greatly  lengthened.  Without  attempting  to  press  too  far  into  the 
origins  of  society  we  may  distinguish  four  main  stages  of  develop- 
ment, from  the  })oint  of  view  of  industrial  society:  (i)  The  indejiend- 
ent  or  domestic  economy;  (2)  the  town  or  local  economy;  (3)  the 
national  economy;    (4)  the  international  or  world  economy. 

The  first  stage  is  illustrated  by  the  Indian,  the  patriarchal  family, 
the  primitive  tribe,  or  the  western  ])ioneer.  The  wants  of  all  in 
these  cases  were  supplied  by  the  products  of  their  own  efforts  without 
any  very  roundabout  process.  The  next  stage  appears  where  an 
exchange  of  ])roducts  becomes  customary.  Division  of  labor  takes 
place.  The  process  of  production  occupies  a  longer  time  and  becomes 
more  efficient,  thus  making  it  possible  for  a  given  area  to  support  a 

7 


8  OUTLINES   OF  ECONOMICS 

larger  population.  Then,  as  means  of  transportation  improve,  one 
section  of  the  country  begins  to  specialize  in  one  thing  and  another 
section  in  something  else;  they  are  no  longer  independent  self-sufficing 
units;  the  process  of  production  becomes  more  complicated;  and  we 
have  the  growth  of  a  national  economy.  Sometimes  this  process  of 
specialization  may  be  carried  so  far  that  a  whole  nation  comes  to 
specialize  in  manufacturing,  and  becomes  very  largely  dependent 
upon  other  countries  for  its  raw  material  and  food  supjilies,  as  in 
the  case  of  Great  Britain  today.  Such  a  situation  may  well  be  called 
an  international  economy.  The  present  tendency  toward  this  stage 
is  manifested  in  the  increasing  dependence  of  modern  nations  upon 
foreign  supplies  and  foreign  markets. 

These  stages  of  economic  development  have  appeared  in  different 
countries  at  different  times;  in  some  places  one  stage  continued 
dominant  for  many  centuries,  as  in  parts  of  Europe;  in  others  a  stage 
may  have  lasted  but  a  few  decades,  as  in  the  United  States.  There 
are  many  intermediate  stages,  and  one  seldom  finds  a  situation  where 
the  household,  the  locality,  or  the  nation  is  absolutely  self-sufficing. 

Questions 

1 .  Are  any  industries  today  in  the  handicraft  stage  ? 

2.  Why  were  there  formerly  many  more  "jacks  of  all  trades"  than 
there  are  now  ? 

3.  Mention  some  concrete  cases  where  (a)  the  development  of 
transportation  and  communication,  (b)  geographical  conditions,  (c) 
social  institutions,  (d)  racial  characteristics,  have  influenced  the  evo- 
lution of  industrial  society. 

4.  In  the  evolution  of  industrial  society  trace  some  of  the  mani- 
festations of  increase  in  (a)  specialization  and  division  of  labor;  (b) 
social  interdependence;  (c)  complexity  of  form;  (d)  productive 
efficiency. 

5.  Was  there  formerly  the  gulf  between  the  laboring  class  and 
the  employing  class  that  exists  today  ? 

6.  Formerly  a  cobbler  owned  his  own  shop  and  tools,  managed 
the  shop,  employed  apprentices,  and  did  some  of  his  work  himself. 
How  does  the  modern  large  shoe  factory  differ  from  that  ? 

7.  Do  you  think  the  modern  organization  of  industry  requires 
greater  managerial  skill  and  ability  than  formerly,  and  if  so,  why  ? 

8.  Do  the  captains  of  industry  of  today  usually  own  the  concerns 
they  manage  ?     What  was  the  situation  in  earlier  times  ? 

9.  Suppose  all  the  railroads  in  the  country  were  removed.  How 
would  that  affect  the  efficiency  of  industry  ? 

10.  Trace  in  detail  and  from  the  very  first  the  processes  which 


PRELIMINARY  SURVEY  OF  ECONOMIC   SYSTEM  9 

have  aided  in  sui)plying  you  with  your  cup  of  coffee.  How  many 
people  do  you  suppose  helped  in  those  processes?  Do  you  think 
it  desirable  to  be  dependent  on  so  many  people  in  the  satisfying  of 
your  wants  ? 

II.  Estimate  the  time  that  has  elapsed  since  the  first  steps  were 
taken  which  have  resulted  in  the  issue  of  this  morning's  daily  news- 
paper. Why  is  it  worth  while  to  spread  the  work  over  so  long  a 
I)eriod  ? 


II.  Certain  Characteristics  of  the  Present  Economic  System 

1.  Private  Properly 

2.  Freedom  of  Com pctUion 

3.  Co-operation  through  Exchange  of  Goods 

4.  The  Money  Economy 

The  present  stage  of  economic  evolution,  as  evidenced  in  the 
United  States,  is  marked  by  specialized  production,  in  connection 
with  a  highly  developed  system  of  the  exchange  of  goods.  This 
development  of  exchange,  in  turn,  is  facilitated  by  the  convention  of 
money-payments  instead  of  the  more  primitive  and  inconvenient 
method  of  barter.  Centralization  and  enlargement  of  the  scale  of 
industry  have  accompanied  the  widening  of  markets.  Capital, 
invested  in  machinery  and  other  equipment,  has  so  accumulated  that 
the  owners  of  ca])ital  e.xercise  a  dominant  influence  in  industrial 
management.  Underlying  these  modern  economic  manifestations 
are  the  long-established  institution  of  private  property  and  the  more 
recent  assumption  that  every  man  is,  in  theory  at  least,  individually 
free  to  work  for  the  furtherance  of  his  own  interests,  as  he  conceives 
his  interests,  according  to  ])rincipk's  of  comparatively  unrestricted 
competition. 

These  several  features  of  the  current  ccononiic  process  will  be 
subsequently  encountered  in  the  discussion  of  various  specific  prob- 
lems. Private  pro])erty,  competition,  exchange-co-operation,  and 
the  money  economy  are  selected  for  more  particular  notice  at  this 
point.  They  are  to  be  regarded  as  devices  for  increasing  our  ])ower 
over  the  external  conditions  of  existence — i.e.,  satisfying  our  wants — 
which  have  proved  so  successful  that  they  have  been  generally 
adopted.  Although  these  devices  are,  properly  speaking,  in  them- 
selves economic  phenomena,  we  more  often  think  of  them  as  condi- 
tions un(lerl\Tng  our  economic  acti\'ilies,  and  economic  science  in  a 
measure  takes  them  for  granted  as  fundamental  characteristics  of  our 
civilization. 


lo  OUTLINES   OF  ECONOMICS 

1.  Private  Property 

Questions 

1.  If  a  man  steals  a  watch  does  it  become  his  property?  What 
is  the  difference  between  possession  and  property  ? 

2.  Might  there  bQ  private  property  in  clothes,  weapons,  and  other 
articles  of  personal  use  apart  from  a  recognition  of  similar  property- 
rights  in  land,  machinery,  factory  buildings,  etc.  ? 

3.  If  there  were  no  assurance  of  undisturbed  and  permanent 
possession  of  land  would  men  (a)  hunt  ?  (b)  raise  cattle  ?  (c)  plant 
crops  ?    (d)  build  houses  ?    (e)  construct  railroads  ? 

4.  What  relation  can  you  point  out  between  private  property  and 
(a)  social  peace  and  order  ?  (b)  foresight  and  industriousness  ?  (c)  in- 
vention ?  (d)  capitalistic  production  ?  (e)  the  private  family  ?  (/) 
proi-ision  for  education  of  children  and  their  start  in  life  ?  (g)  philan- 
thropy ? 

5.  Should  property-rights  last  beyond  one  lifetime? 

6.  Compare  the  right  of  inheritance  and  the  power  of  bequest  as 
motives  to  industrial  efificiency. 

7.  Make  a  list  of  the  disadvantages  of  private  property. 

8.  Is  private  property  a  natural,  inalienable,  inherent  right,  or 
a  matter  of  social  agreement,  based  on  expediency  ? 

g.  Should  the  right  to  private  property  be  restricted  or  abolished 
if  in  the  judgment  of  society  its  clisadvantages  outweigh  its  advan- 
tages ?    Have  property-rights  been  limited  in  the  past  ? 

2.  Freedom  of  Competition 

Under  this  head  are  treated  together  freedom  of  initiative,  freedom 
of  contract,  and  the  principle  of  self-interest. 

Questions 

1.  Is  everyone  free  to  run  a  saloon?  to  practice  law?  to  sell 
adulterated  food  ?  to  conduct  a  lottery  ?  to  sell  cigarettes  to  minors  ? 
to  sell  himself  into  slavery  ?   to  fix  cab-fares  ? 

2.  Make  a  list  of  practical  obstacles,  as  cUstinguished  from  legal 
restrictions,  which  limit  industrial  freedom. 

3.  Is  our  present  system  "industrial  anarchy''  ? 

4.  Are  '^laissez-faire"  and  "competitive  system"  synonymous 
terms  ? 

5.  Should  there  be  any  presumption  either  for  or  against  "state 
interference,"  or  should  each  case  be  decided  upon  its  merits  ?  What 
do  you  mean  by  "merits"  ? 

6.  How  does  it  happen  that  we  do  not  ha\'e  the  state  look  after 


PRELIMINARY   SURVEY   OF   ECONOMIC   SYSTEM         li 

the  supplying  of  our  wants  instead  of  relying  on  individual  initiative? 
Do  you  know  of  any  case  where  the  state  does  carry  this  burden  ? 

7.  Does  the  government  violate  the  principle  of  free  initiative 
by  (a)  subsidizing  steamship  lines  ?  (b)  paying  bounties  for  kilUng 
woodchucks?  Do  these  policies  imply  that  individual  initiative  is 
an  inadequate  motive  to  economic  activity  ? 

8.  Can  you  mention  cases  where  the  state  takes  part  directly  in 
industry  today  ? 

9.  Are  there  any  ways  in  which  the  state  aids  indirectly  in  industry 
today  ? 

10.  In  so  far  as  the  state  participates  in  industry,  is  its  participa- 
tion intended  (a)  to  exclude  private  industry  ?  (b)  to  compete  with 
private  industry  ?   (c)  to  make  up  for  the  lack  of  private  industry  ? 

11.  To  what  extent  is  competitive  business  dominated  by  self- 
interest  ? 

12.  Does  the  ordinary  man  know  what  is  for  his  best  interest? 
Would  it  be  safe  to  assume  that  men  always  pass  an  intelligent 
judgment  upon  the  advantages  and  disadvantages  of  any  course  of 
action  ?  How  does  your  answer  bear  upon  the  validity  of  the  assump- 
tion that  free  competition  is  desirable  ? 

3.  Co-operation  through  Exchange  of  Goods 

Everyone  appreciates  that  the  modern  industrial  society  is  an 
"exchange-society."  Practically  no  one  produces  all,  or  even  many, 
of  the  things  he  consumes.  It  is  not  so  generally  appreciated  as  it 
should  be  that  this  is  in  reality  a  process  of  co-operation,  none  the 
less  real  because  carried  on  unconsciously.  No  formal  machinery 
has  been  set  up  as  a  conscious  act,  but,  as  Professor  Taylor  says,  our 
co-operation  is  both  effected  and  regulated  by  exchange. 

Questions 

1.  Why  does  not  everyone  make  the  same  commodity? 

2.  How  does  it  happen  that  the  things  produced  are  generally  the 
things  we  want  ? 

3.  Discuss  the  situation  of  a  coal  miner  under  a  system  accord- 
ing to  which  his  wages  could  consist  of  only  the  goods  he  produced. 
Could  coal  be  used  as  fuel  to  any  general  extent  under  such 
conditions  ? 

4.  Show  how  our  co-operation  is  effected  through  exchange. 

5.  Show  how  our  co-operation  is  regulated  by  exchange. 

6.  "Exchange  docs  not  really  helj).  Indeed  it  hinders.  Time 
and  energy  are  spent  in  merely  passing  goods  on."     Do  you  agree  ? 

7.  Adam  Smith,  in  a  famous  passage  in  The  Wealth  of  Nations, 


12  OUTLINES  OF  ECONOMICS 

observes  that  every  individual  who,  in  pursuit  of  his  own  gain,  directs 
his  industry  in  such  a  way  that  the  product  may  have  the  greatest 
possible  value,  is  "led  by  an  invisible  hand"  to  promote  unintention- 
ally the  public  welfare.  Should  you  accept  as  true  the  implication 
that  exchange-co-operation  completely  reconciles  the  interests  of 
individuals  and  the  community  ?  Are  individuals  ever  rewarded  for 
actions  which  peld  a  present  benefit  to  some,  but  are  in  the  long  run 
detrimental  to  society  ? 

8.  Are  the  goods  which  sell  to  the  best  advantage  necessarily  or 
usually  the  most  serviceable  ? 

9.  Does  the  manufacturer  know  the  precise  tastes  and  needs  of  the 
persons  who  are  to  use  his  product  ?  Does  he  know  what  sorts  of 
goods  will  be  most  readily  salable  through  wholesalers  ?  In  deciding 
what  to  make  does  he  primarily  consider  the  nature  of  human  wants 
or  immediate  market  conditions? 

10.  How  far  true  is  the  statement  that  exchange  leads  to  increase 
of  individual  wealth  rather  than  to  enhancement  of  the  general 
welfare  ?  Would  general  welfare  be  furthered  if  exchange-co-opera- 
tion were  abandoned  ? 

11.  Attempt  to  summarize  the  social  benefits  of  exchange-co-opera- 
tion. 

12.  Could  organized  exchange  exist  if  there  were  no  recognition 
of  private  property  ? 

4.  The  Money  Economy 

Questions 

1.  To  what  extent  would  contemporary  industrial  methods  be 
possible  if  the  device  of  money  had  never  been  adopted  as  a  means  of 
facilitating  exchange  ? 

2.  How  could  you,  without  reckoning  in  terms  of  dollars  and  cents 
or  other  monetary  units,  answer  such  a  question  as  (a)  by  how  much 
did  exports  exceed  imports  in  a  certain  year  ?  (b)  how  large  a  business 
does  X  transact  ?   (c)  does  your  farm  pay  ? 

3.  If  the  money  value  of  the  wheat  crop  should  some  year  exceed 
the  money  value  of  the  pre\'ious  crop  by  100  per  cent  should  you  say 
the  crop  was  twice  as  great  as  before  ? 

4.  Is  money  an  adequate  measure  of  (a)  effort  ?  (b)  utility  ?  (c) 
welfare  ? 


The  intricacies  of  exchange  and  of  the  money  economy  can  be 
only  very  superficially  touched  upon  at  this  stage  of  the  study.  But 
it  is  important  from  the  start  to  recognize  two  principles,  neglect  of 


PRELIMINARY   SURVEY   OF   ECONOMIC   SYSTEM         13 

which  introduces  a  certain  element  of  confusion  into  subsecjuent 
analysis  unless  great  pains  be  taken  to  make  allowance  for  them. 

(i)  In  an  economic  system  based  on  exchange  the  immediate 
advantage  of  a  bargain  is  more  likely  to  occupy  men's  minds  and  to 
determine  their  actions  than  is  concern  for  the  ultimate  good  which 
may  result  to  society.  Consequently,  in  dealing  with  many  problems, 
individual  advantage  and  social  advantage  must  be  considered 
separately.  The  corresponding  distinction,  between  individual  or 
acquisitive  gain  and  social  gain,  is  of  much  importance  and  no  Httle 
difficulty.  The  interests  of  the  individual  and  of  society  are  not 
necessarily  opposed,  but  they  often  may  be. 

(2)  Economic  quantities  are  expressed  sometimes  in  terms  of  num- 
ber, bulk,  etc.,  and  at  other  times  in  terms  of  money  value.  Thus  a 
job  may  he  said  to  involve  three  days'  labor,  or  six  dollars'  expen- 
diture for  wages;  a  crop  may  be  estimated  as  1,500  bushels,  or  $800; 
a  spinning  mill  may  be  described  as  of  so  many  spindles,  or  in  terms  of 
the  money  invested.  Of  these  two  forms  of  expression,  the  pecuniary, 
or  money-value  form,  is  probably  the  more  usual  in  ordinary  lan- 
guage; but  on  the  other  hand,  in  the  investigation  of  problems  it  may 
well  be  more  important  to  deal  with  days  or  hours  of  labor,  or  with 
the  visible  form  of  the  result.  Neither  terminology  can  be  adequately 
translated  into  the  other.  Logically,  therefore,  economics  as  a  sys- 
tematic science  should  adhere  to  one  or  the  other  consistently.  In 
this  book  logical  consistency  is  consciously  sacrificed  in  the  attempt 
to  present  each  of  the  several  economic  questions  in  the  form  which 
seems  most  appropriate  to  the  purpose  of  an  elementary  course. 
The  student  is  cautioned  to  guard  himself  as  far  as  possible  against 
confusion  in  consecjuence  of  this  change  of  viewpoint. 


D.     THE  PRODUCTIVE  PROCESS 

I.  The  Meaning  of  Production 

II.  Natural  Agents  and  the  Productive  Process 

III.  Labor  and  the  Productive  Process 

IV.  Capital  and  the  Productive  Process 

V.     Organization  and  the  Productive  Process 


I.  The  Meaning  of  Production 

Production  is  the  bringing  into  existence  of  economic  goods  in 
order  to  satisfy  the  wants  which  nature  does  not  freely  furnish  the 
means  to  satisfy.  As  has  been  seen  these  goods  may  be  material  or 
non-material,  and  it  is  not  possible  to  say  that  one  form  is  more 
important  than  the  other. 

The  productive  process  does  not  exist  as  a  thing  in  itself,  separate 
from  the  exchange  and  distributive  processes.  But  at  this  point  in 
our  study  emphasis  will  primarily  be  placed  on  the  productive  aspect 
of  industrial  society.  In  dealing  with  complex  and  interacting 
phenomena  it  is  necessary  to  resort  to  such  abstractions  chiefly  as  a 
method  of  exposition. 

Questions 

1.  Give  examples  of  the  creation  of  form-utilities;  of  place-utilities; 
of  time-utilities;  of  possession-utilities. 

2.  Is  a  railroad  an  instrument  of  production,  of  exchange,  or  of 
distribution,  in  the  economic  sense  ? 

3.  Are  the  following  enterprises  productive:  cold  storage;  the 
express  business;  the  mail  service;  the  telephone  service;  a  retail 
candy  business;  speculative  buying  of  grain  to  be  held  for  a  rise  in 
price  ? 

4.  Are  book-agents  producers  or  mere  parasites  on  the  industry 
of  others  ? 

5.  Do  you  agree  with  the  doctrine  that  what  one  man  gains  at 
trade  other  men  necessarily  lose  ? 

6.  It  was  once  maintained  that  agriculture  and  mining  are  the  only 
forms  of  industry  truly  productive,  inasmuch  as  manufacture  merely 
elaborates  the  commodities  which  agriculture  and  mining  have  pro- 
duced.    Criticize  this  argument. 


THE   PRODUCTIVE   PROCESS  1$ 

7.  Do  social  conditions  guide,  restrict,  or  otherwise  influence 
production  ?     If  so,  give  concrete  examples. 

8.  Is  a  poor  crop  a  sign  of  a  poor  farmer  ?  of  a  poor  farm  ?  of  a 
poor  season  ? 

9.  Can  you  estaljlish  which  is  the  more  important  factor  in  pro- 
duction :  human  ability  or  the  responsiveness  of  our  surroundings  ? 

10.  Can  one  establish  that  nature  aids  more  in  one  industry  than 
in  another? 

11.  Describe  carefully  what  "production"  involves  in  the  case  of 
(a)  coal;  (b)  lumber;  (c)  hay;  (d)  champagne;  (e)  watches;  (/) 
books. 

12.  Production  has  been  classified  descriptively  as  follows: 

A.  Material  Production 

a)  Mere  occupancy 

b)  Extractive  industries 

c)  Manufacturing 

d)  Transportation 

B.  Non-Material  Production 

a)  Ideas  with  economic  consequences 

b)  Work  of  credit  institutions 

c)  Services,  e.g.,  work  of  domestics,  teachers,  etc. 
Criticize  this  scheme.     Draw  up  a  classification  of  your  own. 


In  the  following  sections  (II-V)  we  shall  be  concerned  with  an 
analysis  of  the  various  parts  or  agents  of  the  j)roductive  process. 
Much  of  the  matter  to  be  presented  is  descriptive  rather  than  strictly 
logical,  and  much  of  it  has  to  do  with  the  technique  of  industry.  In 
dealing  with  these  agents  of  the  productive  process  it  is  particularly 
important  to  observe  the  precautions  suggested  on  p.  13,  and  to 
discriminate  (a)  Ijetween  the  indi\idual  and  the  social  viewpoint,  and 
(b)  between  the  pecuniary  terminology  and  the  terminology  which 
reckons  with  labor-time,  and  with  number  or  bulk  of  materials  and  of 
output. 

II.  Natural  Agents  and  the  Productive  Process 

1.  The  Function  of  Xaiiiral  Agents  in  the  Productive  Process 

2.  The  Increase  of  Production  as  Determined  by  Land 

3.  The  Conservation  of  Xatural  Resources 

The  term  "natural  agents,"  in  this  connection,  inckides  all  factors 
and  conditions  affecting  ])ro(lurtion  which  are  non-human  and  essen- 
tially independent  of  human  (.fforl  and  ingenuity. 


1 6  OUTLINES   OF  ECONOMICS 

1 .  The  Function  of  Natural  Agents  in  the  Productive  Process 

Questions 

1.  Give  examples  of  industries  peculiarly  dependent  on  gravita- 
tion, rain,  wind,  sunshine,  tide,  moisture,  temperature,  qualities  of 
soil. 

2.  How  have  natural  conditions  affected  the  industry  of  Michigan, 
Greenland,  Egypt,  Central  America? 

3.  What  are  the  chief  natural  resources  of  the  United  States  ?  In 
respect  of  what  resources  is  the  United  States  pre-eminent  ? 

4.  In  his  practical  discussion  of  "natural  agents"  the  economist 
largely  confines  his  attention  to  what  is  generally  known  as  land. 
Can  you  justify  this  ? 

5.  Which  of  the  various  physical  properties  of  land  are  of  special 
importance  to  (o)  the  lumberman  ?  (b)  the  miner  ?  (c)  the  manufac- 
turer? (d)  the  shopkeeper?  (e)  the  traveling  salesman?  (/)  the 
ci\dl  engineer  ?    (g)  the  fisherman  ? 

6.  Is  land  necessary  to  all  production  ?  How  about  the  services  of 
the  domestic  servant  ? 

7.  Generalizing  your  answers  to  the  two  preceding  questions,  what 
do  you  think  are  the  fundamental  uses  of  land  in  production  ? 

2.  The  Increase  or  Production  as  Determined  by  Land 

a)  Physical  Limitation  of  Land 

b)  Exhaustion  of  the  Powers  of  Land 

c)  The  Law  of  Return.  (This  law  is  discussed  here  as  applying 
only  to  land.  A  wider  application  of  the  principle  will  be  made 
later  under  the  topic  of  "Organization.") 

Questions 

1.  Is  there  any  limit  to  the  amount  of  land? 

2.  What  is  made  land?  Can  land  be  made  by  draining?  irrigat- 
ing ?  fertilizing  ?   addition  of  sand  or  clay  ? 

3.  What  is  meant  by  the  expression  "exhausted  land"?  What 
properties  of  land  are  subjected  to  exhaustion  ? 

4.  What  is  rotation  of  crops  ?     Why  is  it  resorted  to  ? 

5.  Why  should  a  farmer  ever  break  up  new  land? 

6.  Why  does  any  farmer  cultivate  more  than  one  acre  at  any  one 
time  ? 

7.  Why  are  different  qualities  of  land  under  cultivation  ? 

8.  State  the  principle  of  diminishing  returns  from  land. 


THE   PRODUCTIVE   PROCESS  17 

g.  What  is  intensive  cultivation  ?  What  is  extensive  cultivation  ? 
Give  examples. 

10.  Explain  the  term  margin  of  cultivation,  distinguishing  between 
the  extensive  margin  of  cultivation  and  the  intensive  margin  of  culti- 
vation. 

11.  Work  out  a  demonstration  of  the  fact  that  the  profitable 
limit  to  intensive  cultivation  is  reached  at  the  point  where  the  return  to 
labor  and  capital  under  conditions  of  intensive  cultivation  corresponds 
to  the  return  to  labor  and  capital  on  land  at  the  extensive  margin  of 
cultivation. 

12.  Is  the  best  land  always  utilized  first?  Did  the  Plymouth 
colonists  cultivate  the  best  soils  in  America?  Did  they  presumably 
cultix'ate  at  the  outset  the  most  fertile  land  in  Plymouth  ?     Why  ? 

13.  Does  the  fact  that  many  New  England  farmers  have  moved 
westward  to  better  land  disprove  the  law  of  diminishing  returns  ? 

14.  In  what  sense  is  it  true  that  the  extension  of  agriculture  and 
manufacture  involves  resort  to  land  less  fertile  or  less  advantageously 
situated  than  the  land  previously  in  use  ? 

15.  A  certain  farmer,  by  draining  and  fertilizing  his  land,  has 
gradually  so  improved  it  that  it  would  now  yield,  to  the  same  amount 
of  labor,  twice  as  much  product  as  formerly.  Nevertheless,  the 
cultivation  of  this  land  has  from  the  first  been  attended  with  diminish- 
ing returns.     Explain. 

16.  Point  out  clearly  the  distinction  between  diminishing  returns 
from  land  and  declining  fertility  of  land. 

17.  Distinguish  clearly  (a)  increasing  returns  from  land;  (b) 
utilization  of  better  land;  (c)  better  utilization  of  land  according  to 
existing  agricultural  methods;  (d)  effects  of  the  discovery  of  new 
and  improved  agricultural  methods. 

18.  Does  the  law  of  diminishing  returns  apply  to  land  only  in  the 
case  of  its  use  for  agricultural  ])ury)oses? 

19.  Does  the  law  of  diminishing  returns  ai)ply  to  a  coal  mine?  to 
building  sites  in  the  center  of  a  city  ? 


3.  The  Conservation  of  Natural  Resources 

Questions 

1.  Does  conservation  mean  non-utilization  of  natural  resources, 
or  such  utilization  as  shall  cause  a  miiiinuim  impairment  of  the  natural 
resources  of  the  future? 

2.  A  man  owns  a  tract  of  timber  on  a  mountain  side.     If  he  leaves 


1 8  OUTLINES  OF  ECONOMICS 

it  in  its  natural  state  the  old  trees  will  die  out  and  be  wasted,  the 
growth  of  new  trees  will  be  slow,  and  the  presence  of  dead  wood  and 
underbrush  may  increase  the  danger  of  loss  by  fire.  If  he  cuts  gradu- 
ally and  scientifically  he  may  get  a  regular  income  from  the  timber 
removed  and  yet  improve  the  quality  of  what  remains.  If  he  cuts 
all  off  at  once  he  will  realize  the  largest  immediate  revenue  above 
expenses  of  lumbering,  but  the  land  will  be  wasted  by  washing  and  by 
a  useless  second-growth.     Which  procedure  would  be  conservation  ? 

3.  Does  conservation  require  a  sacrifice  of  the  present  generation 
for  the  benefit  of  future  generations  ?  On  what  grounds  could  such 
a  sacrifice  be  demanded  ? 

4.  It  is  argued  that  the  public  land  policy  of  this  country,  by 
disposing  of  lands  at  a  nominal  price,  has  led  to  wasteful  agriculture. 
What  is  meant  by  wasteful  agriculture  ?  Would  anyone  deliberately 
waste  his  own  land  ? 

5.  European  visitors  to  the  United  States  have  often  been  shocked 
at  the  apparent  wastefulness  of  the  extensive  cultivation  practiced 
on  American  plantations  and  farms.  Would  it  have  been  less  waste- 
ful to  practice  farming  in  this  county  after  the  fashion  of  European 
peasants  who  build  stone  terraces  to  hold  the  soil  on  hill  slopes,  or 
carry  home  by  hand  bundles  of  hay  which  they  have  mowed  on  the 
mountain  side  ? 

6.  What  should  you  say  to  the  statement  that  nobody  can  afford 
to  practice  conservation  in  his  own  interest  until  most  of  the  resources 
which  might  have  been  conserved  are  already  exhausted  ?  Does  this 
suggest  that  conservation  should  be  a  governmental  function  ? 

7.  Since  the  beginning  of  the  petroleum  industry  in  this  country 
the  output  has  been  doubling  every  nine  years.  At  this  rate  of 
development  the  present  known  supply  of  petroleum  will  be  exhausted 
by  1935.  What  measures  might  be  adopted  to  make  the  supply  hold 
out  longer  ?  Have  substitutes  for  petroleum  been  invented  in  the 
past  ?     Can  you  foresee  further  substitution  ? 

8.  It  has  been  contended  that  the  supply  of  phosphates  in  the 
United  States  should  be  guarded  by  prohibiting  their  export.  Would 
this  be  wise  ?  If  other  nations  retaliated  by  prohibiting  the  export  of 
their  raw  products  should  we  be  better  or  worse  off  than  before  ? 

9.  The  coal  supply  in  this  country,  according  to  a  recent  estimate, 
will  be  exhausted  in  150  years.  What  economies  in  the  use  of  coal 
might  be  practicq/i  in  order  to  conserve  this  resource  ? 

10.  Suggest  methods  of  safeguarding  the  future  of  our  timber- 
supply. 


THE   PRODUCTIVE   PROCESS  19 

III.  Labor  and  the  Productive  Process 

1 .  2I1C  Definition  of  Labor 

2.  The  Elements  of  the  Labor  Power  of  a  Community 

3.  The  Conservation  of  Human  Energy 

4.  The  Increase  of  Population 


1.  The  Definition  of  Labor 

Questions 

1.  Should  the  effort  of  a  dray-horse  be  called  labor? 

2.  Give  examples  of  human  acti\-ity  which  should  unquestionably 
be  regarded  as  labor. 

3.  Give  examples  of  human  activity  which  clearly  is  not  to  be 
regarded  as  labor. 

4.  Is  the  effort  of  the  following  to  be  called  labor:  a  banker,  a 
college  football  player,  a  professional  baseball  player,  a  promoter, 
an  opera  singer,  a  hod-carrier,  a  preacher,  a  voluntary  settlement- 
worker  ? 

5.  Should  you  call  the  hod-carrier  a  laborer  if  he  worked  for 
pleasure?  Should  you  call  the  college  football  i)layer  a  laborer  if 
he  were  given  his  board  ? 

6.  In  order  that  human  activity  should  be  regarded  as  labor  is  it 
necessary  that  it  should  (a)  be  attended  with  a  sense  of  unpleasant 
effort  ?  {b)  be  physical  rather  than  mental  ?  (c)  be  intended  as  a  means 
to  an  end,  rather  than  be  desirable  in  itself?  {d)  actually  result  in  a 
product  ?  {e)  result  in  a  material  product  ?  (/)  command  remunera- 
tion in  money  or  the  equivalent  ? 

7.  In  the  light  of  the  preceding  (juestions  how  should  you  deline 
labor  ? 

8.  Is  the  necessity  of  labor  peculiar  to  the  present  organization 
of  society?  Can  you  conceive  of  any  social  reform  which  might 
abolish  the  necessity  of  labor  ? 

2.  The  Elements  of  the  Labor  Power  of  a  Community 

a)  The  Number  of  Laborers  (see  the  topic  "Increase  of  Popula- 
tion "  below) 

b)  The  Efficiency  of  Each  Individual 

i.  Health  and  Strength 

ii.  Mental  Qualities 

iii.  Moral  Qualities 

iv.  Social  Conditions 


20  OUTLINES   OF   ECONOMICS 

c)  Time  of  Labor 

d)  Division  oj  Labor  (treated  under  "Organization") 

Questions 

1.  What  is  meant  by  ''efficiency"  of  labor? 

2.  Is  efficiency  an  absolutely  definite  quality,  inherent  in  an  indi- 
vidual, and  independent  of  social  conditions  ? 

3.  How  largely  is  efficiency  due  to  (a)  innate  capacity?  {b)  train- 
ing and  the  opportunity  to  work  at  the  task  for  which  one  is  best 
fitted  ? 

4.  Mention  some  of  the  mental  cjualities  which  ordinarily  conduce 
to  the  efficiency  of  a  workman. 

5.  What  moral  qualities  can  you  cite  to  explain  the  superior 
efficiency  of  American  laborers  ? 

6.  Would  ambitious  and  alert  self-interest,  apart  from  social  or 
altruistic  motives,  result  in  the  highest  efficiency  of  labor  ? 

7.  To  what  extent  is  the  efficiency  of  labor  dependent  on  the  intel- 
ligence aud  consideration  shown  by  employers  ? 

8.  Judging  by  the  present  direction  of  industrial  development,  is 
physique,  intellect,  or  social  organization  likely  to  count  for  most  in 
any  future  increase  of  productive  efficiency  ? 


3.  The  Conservation  of  Human  Energy 

The  following  scheme  indicates  some  of  the  forms  of  the  waste  of 
human  energy: 

EXAMPLES   OF   THE   WASTE    OF   HUMAN   ENERGY 

a)  Destructive  Occupation 

i.  Persons   Consciously  or  Unconsciously  Engaged  in  Work 

Contrary  to  Public  Interests:    criminal  classes, 
ii.  Persons  in  Unhealthful  or  Hazardous  Occupations:    child- 
laborers;   women  working  under  unsuitable  conditions. 

b)  Dependency 

The  Unemployable:    defectives;    degenerates;    invalids;    per- 
sons temporarily  ill  or  disabled. 

c)  Ldleness 

i.  The  Unemployed 
ii.  The  Voluntarily  Idle 


THE   PRODUCTIVE   PROCESS  21 

d)  Inadequate  Occupation 

The  Imperfectly  Employed:  mieducated  persons;  persons  in 
occupations  unsuited  to  their  capacities,  as  a  result  of  ignorance, 
thoughtlessness,  conventions,  or  lack  of  opportunity^;  dilettanti. 

Questions 

1.  Analyze  the  causes  for  the  different  forms  of  waste  above 
indicated,  and  point  out  in  each  case  promising  means  of  reform. 

2.  Is  a  waste  of  labor  power  involved  in  {a)  the  care  of  the  sick  ? 
{b)  the  care  of  persons  too  young  to  work  ?  (c)  the  care  of  persons  too 
old  to  work  ?  {d)  compulsory  school  attendance  ?  {e)  premature 
death  ?   (/)  militarism  ?    (g)  debauchery  ? 

3.  A  recent  investigation  showed  that  deaths  from  consumjition 
amounted  to  36  per  cent  of  all  deaths  among  stone  cutters,  and  to  but 
6 . 2  per  cent  among  workers  on  farms.  What  is  the  reason  for  the 
difference  ?     Can  the  evil  be  remedied  ? 

4.  The  deaths  from  accidents  in  Pennsylvania  coal  mines  for  the 
ten  years  1899-1908  reached  a  total  of  9,937.  In  Illinois,  in  the  same 
ten  years,  1,391  deaths  in  coal  mines  were  recorded,  and  5,423  cases 
of  injury,  which  caused  an  average  of  53  days  of  disability  to  each 
of  the  men  who  ultimately  recovered.  Precautions  against  such 
disasters  would  be  costly  for  mine  owners.  Would  they  be  more 
costly  to  society  at  large  than  the  accidents  which  now  occur  ? 

5.  Of  the  29  milHons  of  people  working  in  the  United  States  it  is 
estimated  that  o\'er  half  a  million  annually  are  killed  or  crippled — 
a  greater  total  than  that  of  the  killed  and  wounded  on  both  sides  in 
the  Japanese-Russian  war.  Would  it  be  well  to  sujiplcment  the 
peace  movement  by  an  equally  serious  attemj)t  to  lessen  the  risks  of 
industry  ? 

6.  A  competent  authority  estimates  that  "the  actual  economic 
saving  annually  possible  in  this  country  by  preventing  needless 
deaths,  needless  illness  (serious  and  minor),  and  needless  fatigue,  is 
certainly  far  greater  than  one  and  a  half  billions,  and  may  be  three  or 
more  times  as  great."  In  view  of  the  fact  that  the  minimum  estimate 
here  given  amounts  to  about  three  times  the  total  ordinary  annual 
receipts  of  the  federal  government,  and  rather  exceeds  the  annual 
aggregate  value  of  exports  from  the  United  States,  should  you  regard 
the  conservation  of  human  energy  as  a  less  important  economy  than 
the  preservation  of  forests,  water-])ower,  or  mineral  lands? 

7.  European  statistics  indicate  that  the  average  length  of  life  has 
roughly  doubled  since  the  sixteenth  century.  Consider  the  economic 
saving  involved.     Has  the  limit  of  improvement  been  reached  ? 

8.  What  judgment,  considering  the  matter  from  an  economic  point 
of  view  alone,  is  to  be  passed  on  an  idle  rich  man  ? 


22  OUTLINES   OF  ECONOMICS 

9.  Are  the  members  of  the  leisure  class  presumably  persons  of 
greater  or  less  capacity  than  the  average  man  or  woman  ?  How  much 
does  society  lose  by  their  idleness  ? 

10.  Is  it  possible  to  tell  by  a  man's  earnings  whether  he  is  (a) 
destructively  employed  ?   (b)  imperfectly  employed  ? 

11.  Does  the  fact  that  many  persons  go  to  college  as  a  matter  of 
course  cause  them  to  be  more  or  less  imperfectly  employed  than  they 
would  otherwise  have  been  ? 

12.  Can  you  demonstrate  that  it  would  be  to  the  economic  advan- 
tage of  the  community  at  large  if  every  workman  received  such  wages 
as  should  enable  him  to  work  at  maximum  efhciency — ^i.e.,  to  produce 
the  largest  possible  output  relatively  to  the  cost  of  his  maintenance  ? 
Is  such  a  result  actually  attained  ?   Why  ? 

13.  Does  the  competitive  system  on  the  whole  increase  or  prevent 
the  waste  of  human  energy  ? 

4.  The  Increase  of  Population 

a)  Natural  Increase 

b)  Immigration 

The  theory  of  population  has  commonly  been  discussed  as  if  it 
were  essentially  the  explanation  of  the  number  of  laborers,  because 
the  supply  of  labor  has  some  relation  to  the  total  population.  In 
deference  to  that  usage  it  is  introduced  at  this  point;  though  properly 
the  problem  of  population  is  much  broader  and  involves  not  only 
man  as  a  producer  but  also  man  as  a  consumer. 

Populations  are  increased  (a)  by  excess  of  births  over  deaths,  or 
natural  increase,  and  (b)  by  excess  of  immigration  over  emigration. 

a)  Natural  Increase 

i.  The  Problem  of  Numbers 
ii.  The  Problem  of  Quality 


i.  The  Problem  of  Numbers 

Questions 

1.  State  in  your  own  words  the  Malthusian  theory  of  population. 

2.  When  was  Malthus'  Essay  on  the  Principle  of  Population  pub- 
lished? Was  the  increase  of  population  greater  cause  for  concern 
then  than  now  ?     Why  ? 

3.  Point  out  the  relation  between  the  Malthusian  theory  and  the 
law  of  diminishing  returns  from  land. 


THE   PRODUCTIVE   PROCESS  22, 

4.  What  are  jjositive  checks  ?  preventive  checks  ?  How  has  the 
relative  importance  of  these  two  classes  of  checks  changed  since 
Malthus  wrote? 

5.  What  is  the  standard  of  living?  Does  the  standard  of  living 
affect  the  birth-rate  ?     How  ?     Does  it  aflfect  the  death-rate  ?     How  ? 

6.  Should  you  expect  the  practice  of  preventive  checks,  for  eco- 
nomic reasons,  to  be  most  effectual  among  the  poor,  the  classes  of 
moderate  means,  or  the  rich  ? 

7.  Statistical  investigations  of  the  birth-rates  in  the  richest  and 
the  poorest  quarters  of  a  number  of  cities  have  indicated  that  the 
birth-rate  among  the  very  poor  is  commonly  from  three  to  five  times 
as  high  as  among  the  very  rich.  What  economic  explanations  of  this 
phenomenon  can  you  suggest  ?  What  other  social  factors  may  help 
to  explain  it  ? 

8.  Is  there  any  present  danger  of  overpopulation,  in  general? 
locally  ? 

9.  Does  the  phenomenon  of  "race  suicide"  disprove  the  Mal- 
thusian  theory  ? 

10.  Try  to  restate  the  essential  idea  of  the  Malthusian  theory  in  a 
form  which  you  believe  is  true  today. 

ii.  The  Problem  of  Quality 

Questions 

I.  The  following  figures  are  based  on  recent  vital  statistics  of 
graduate  classes  in  one  of  the  large  American  universities: 


Year  of  Ciraduation 

X 

umber  Gradi 

uatcd 

Sons  Born 

1875 

142 

123 

1880 

175 

145 

1885 

193 

129 

i8qo 

302 

180 

Are  these  unixersity  graduates  maintaining  their  own  numbers  in 
the  population  ?     Is  the  fact  a  cause  for  apprehension  ?     Why  ? 

2.  In  general,  is  it  disadvantageous  for  society  that  the  educated, 
successful,  and  well-to-do  classes  should  be  characterized  by  a  com- 
paratively low  marriage-rate  and  an  extremely  low  birth-rate  ?    Why  ? 

3.  Can  strictly  hereditary  human  characteristics  be  distinguished 
from  the  infiuences  of  ])arental  example,  education,  and  the  env'iron- 
ment  in  general?  In  the  interest  of  social  reform  is  it  important 
that  we  should  be  able  to  make  the  distinction  ?     Why  ? 

4.  The  new  science  of  eugenics  "deals  with  those  social  agencies 
that  influence,  mentally  or  physically,  the  racial  ciualities  of  future 
generations."     In  practice,  eugenic  reform  may  attem])t  ])rimarily 


24  OUTLINES   OF   ECONOMICS 

either  (<;)  to  encourage  the  increase  of  the  best  elements  in  the  popu- 
lation, or  (b)  to  prevent  the  increase  of  the  worst.  Which  policy 
seems  to  you  more  likely  to  be  successful  ? 

b)  Immigration 

Migration — the  redistribution  of  population — includes  internal 
migration  (as  in  the  case  of  persons  leaving  the  country  for  the  city) , 
and  also  the  migration  over  sea,  or  across  national  boundaries,  which 
we  call  emigration  and  immigration.  Immigration,  notably  conspicu- 
ous in  the  United  States,  calls  for  special  comment  at  this  point 
because  of  its  bearing  upon  American  labor  conditions. 

Questions 

1.  Name  the  more  important  motives  by  which  persons  are  (a) 
caused  to  leave  the  country  of  their  birth;  (b)  attracted  to  other 
countries. 

2.  Give  examples  from  the  experience  of  this  country  of  types  of 
immigrants  whose  coming  has  been  due  to  the  several  causes  indicated 
in  your  answer  to  the  preceding  question. 

3.  Explain  the  great  fluctuations  of  the  movement  of  immigrants 
to  the  United  States  since  1820. 

4.  What  great  change  in  the  prevailing  character  of  our  immigrant  i 
has  occurred  wathin  the  last  generation  ? 

5.  It  is  argued  that  cheap  immigrant  labor  is  like  machinery — 
an  added  aid  in  production  which  relieves  the  (native)  laboring 
class  from  heaiy  and  disagreeable  toil.     Is  the  analogy  true  ? 

6.  Is  the  manufacturers'  argument  for  cheap  immigrants  valid 
from  the  point  of  view  of  society  in  general  ? 

7.  Should  immigration  be  prohibited ?  restricted?  If  restrictions 
are  imposed,  should  they  limit  the  number  of  immigrants,  or  fix 
a  test  of  the  cjuality  of  immigrants,  or  do  both  ? 

8.  Why  is  the  immigration  of  the  Chinese  subject  to  special 
restrictions  ? 

9.  What  currents  of  internal  migration  have  been  observable  in 
the  United  States  ? 

10.  Studies  of  the  populations  of  great  cities  in  Europe  and  Amer- 
ica have  shown  that  ordinarily  nearly  three-fourths  of  city-dwellers 
between  the  ages  of  25  and  55  are  persons  born  elsewhere.  Consider 
how  this  evidence  of  the  drift  of  population  toward  cities  bears  upon 
the  problem  of  distributing  throughout  the  United  States  our  foreign 
immigrants,  over  85  per  cent  of  whom  enter  the  country  at  New  York, 
Boston,  Philadelphia,  and  Baltimore. 


THE  PRODUCTIVE    PROCESS  25 

11.  Would  restriction  of  immigration  be  justified  if  the  congestion 
of  immigrants  in  cities  and  along  the  seaboard  could  be  prevented, 
and  the  foreign  elements  distributed  over  the  whole  country? 

12.  It  has  been  contended  that  our  population  is  no  larger  today 
than  it  would  have  been  if  there  had  been  no  immigration.  Can 
this  be  true  ?     Tell  why  n'ou  answer  as  you  do. 

IV.  Capital  and  the  Productive  Process 

1.  The  Definition  and  Function  of  Capital 

2.  The  Accumulation  and  Conservation  of  Capital 


I.  The  Definition  and  Function  of  Capit.^l 

From  the  social  point  of  view  ca])ital  may  be  defined  as  the  material 
instruments  which  man  uses  in  production.  The  question  of  who 
owns  these  in.struments  or  whether  anyone  owns  them  matters  little. 
They  may  be  owned  by  pri\-ate  indix'iduals  or  by  the  state — they  are 
still  aids  in  production.  f>om  the  acquisitive  point  of  view  capital  is 
material  goods  which  yield  an  income.  This  will  include  producers' 
goods,  but  also  some  consumers'  goods.  As  we  are  now  concerned 
with  the  productive  process  we  shall,  for  the  present,  consider  capital 
mainly  from  the  social  point  of  view — i.e.,  as  producers'  goods. 

Questions 

1.  Make  a  list  of  things  which  are  clearly  capital. 

2.  Make  a  list  of  things  which  are  clearly  not  capital. 

3.  Make  a  list  of  things  concerning  the  classification  of  which  you 
are  in  doul)t. 

4.  Are  the  following  caj)ital:  pig  iron;  a  plow;  candy  on  the 
shelves  of  a  retail  dealer;  a  package  of  tobacco  belonging  to  a  laborer; 
a  carriage;    coal  ? 

5.  Capital  has  been  described  as  (a)  future  goods;  (b)  inchoate 
wealth;  (c)  intermediate  products.  What  as])ect  of  the  function  of 
ca])ital  does  each  of  these  j)hrases  suggest?  Illustrate  each  by  two 
or  three  examples. 

6.  Xame  some  em|)]o_\incii1 ,  if  you  can,  in  which  labor  produces 
without  capital. 

7.  In  what  sense  does  capital  ])roduce?  Does  capital  yield  a 
product  a])art  from  the  cinj)loymenl  of  labor?  apart  from  the  use 
of  land  ? 

8.  The  |)rocess  of  i)nKlucing  with  the  aid  of  capital  has  been 
called  indirect  or  roundabout  i)roduction.     Why? 


26  OUTLINES   OF   ECONOMICS 

9.  Why  go  to  work  to  make  a  machine  to  make  a  machine  to 
make  a  machine  to  produce  a  pair  of  shoes  ?  Would  it  not  be  better 
to  avoid  all  that  roundabout  process  and  have  a  cobbler  make  them 
in  the  first  place  ? 

10.  It  has  been  said  that  the  intention  of  the  owner  determines 
whether  a  thing  is  capital  or  not.  Is  this  statement  always  true  ? 
Is  it  ever  true  ?  Could  a  cotton  mill  be  a  consumers'  good  ?  Sup- 
pose the  owner  exchanged  it  for  a  country  house ;  would  the  mill  then 
be  capital  ? 

11.  "A  good  education  is  the  best  of  investments."  Is  an  edu- 
cated mind  capital  ? 

12.  Should  you  regard  as  capital  the  trained  skill  of  (a)  an  opera- 
singer  ?     (b)  a  portrait-painter  ?     (c)  a  surgeon  ?     (d)  a  stone-cutter  ? 

13.  Capital  is  subdivided  into  fixed  and  circulating  capital, 
specialized  and  free  capital.     Give  examples  of  each  sort  of  capital. 

14.  What  does  the  business  man  ordinarily  mean  when  he  speaks 
of  capital  ?  Is  his  view  essentially  different  from  that  which  is  out- 
lined here  ? 

15.  Is  money  capital? 

16.  Are  securities  capital? 

17.  State  the  main  points  of  difference  between  capital  and  land. 

18.  Capital  has  been  variously  defined,  with  reference  to  produc- 
tion, as  (a)  wealth  (excluding  land)  devoted  to  the  further  production 
of  wealth;  (b)  wealth  (excluding  land)  devoted  to  further  production; 
(c)  past  products  devoted  to  further  production.  Which  definition  do 
you  prefer  ?  Why  ?  Do  these  definitions  embody  the  idea  suggested 
by  such  terms  as  "future  goods,"  or  "inchoate  wealth"  ? 

2.  The  Accumulation  and  Conservation  of  Capital 

The  creation  of  capital  goods  is  due  to  the  fact  that  persons, 
attracted  by  the  superior  efficiency  of  capitalistic  production,  are 
induced  to  forego  consumption  which  they  might  have  enjoyed  and 
to  devote  to  the  making  of  producers'  goods  the  effort  that  otherwise 
would  have  been  expended  in  making  goods  for  their  immediate 
satisfaction.  Other  aspects  of  the  accumulation  of  capital  by  saving 
will  be  considered  in  connection  with  the  problem  of  the  rate  of 
interest.  Attention  is  here  concentrated  on  the  economic  importance 
of  the  accumulation  and  maintenance  of  the  capital  goods  which 
saving  makes  possible. 

Questions 

I.  Assuming  that  capital  has  in  general  been  found  to  increase 
the  efficiency  of  industry,  show  (a)  that  diminution  of  capital  regularly 
involves  social  loss;  (b)  that  an  individual  may  sometimes  benefit  by 


THE   PRODUCTIVE   PROCESS  27 

the  sacrifice  of  capital;  but  (c)  that  such  individual  advantage  is 
ordinarily  secured  at  the  expense  of  a  decrease  in  the  producti\-ity  of 
industry  as  a  whole. 

2.  Does  capital — e.g.,  freight  cars,  looms,  coke — literally  replace 
itself  ?     Does  it  make  possible  its  own  replacement  ?     In  what  sense  ? 

3.  What  is  meant  by  a  ''replacement  fund"  ?  What  is  a  "depre- 
ciation charge" ? 

4.  Suppose  a  sugar  refiner  decides  to  go  into  the  silk-spinning 
business.  Can  he  use  his  old  ecjuipment  in  his  new  factory  ?  In 
what  sense  can  he  withdraw  his  capital  from  one  industry  and  invest 
it  in  another  ? 

5.  In  actual  practice  how  is  the  amount  of  invested  capital  kept 
adjusted  to  the  growth  or  decline  of  each  branch  of  industry  ? 

6.  In  what  ways  does  increase  of  capital  conduce  to  the  welfare 
of  the  laboring  classes  ? 

7.  Should  we  naturally  expect  a  great  fire  to  increase  the  amount 
of  employment  for  working-men  generally?     Explain. 

8.  Speaking  of  the  Galveston  flood,  a  writer  said:  "Fortunately, 
such  events  are  not  unmixed  evils.  Employment  will  now  be  found 
for  many  laborers  and  this  benefit  should  not  be  forgotten  or  mini- 
mized by  us."     What  do  you  think  of  the  statement  ? 

Q.  Often  it  is  said  that  extravagant  expenditure  for  luxuries  is 
good  for  industry  because  it  "puts  money  in  circulation."  Would 
it  be  better  for  industry  if  the  money  were  spent  to  build  factories, 
instal  machinery,  and  increase  capital  generally  ? 

ID.  Is  the  miser  or  the  spendthrift  the  more  useful  member  of 
society  ? 

V.  Organization  and  the  Productive  Process 

1 .  Specialization 

2.  The  Economic  Proportioning  of  the  Productive  Factors 

3.  Present  Forms  of  Industrial  Organization 

4.  Modern  Organization  Exemplified  by  Cerlai)i  fiidnslrics 

In  the  discussion  of  Land,  Labor,  and  Capital  in  their  relation  to 
the  productive  process  attention  was  given  chielly  to  facts  and  prin- 
ciples which  would  hold  true  under  practically  any  organization  of 
society.  The  ])roblem  now  before  us  is  to  examine  the  main  features 
of  the  present  organization — to  see  how  the  forces  we  have  ])een  clis- 
cussing  are  actually  utilized  today.  This  inquiry  is  not  an  inquiry 
into  the  wisdom  or  lack  of  wisdom  of  the  ])resent  organization.  It  is  a 
specific  inquiry  into  particular  facts,  and  into  llu'  i)rincii)les  which 
underlie  ihem. 


28  OUTLINES   OF   ECONOMICS 


I.  Specialization 


a)  Specialization  in  Relation  to  Exchange 

b)  The  Separation  of  Occupations 

c)  The  Division  of  Labor 

d)  Territorial  or  Geographical  Specialization 

i.  Grouping  of  Related  Industries 
ii.  Grouping  of  Many  Plants  of  the  Same  Industry 

e)  Factors  Limiting  the  Degree  of  Specialization 

i.  The  Nature  of  the  Industry 

ii.  The  Extent  of  the  Market.     (Note  the  relation  of  trans- 
portation to  the  extent  of  the  market.) 
iii.  Social  Institutions 
iv.  Financial  Organization 


^to"- 


Questions 

1.  Is  any  specialization  of  economic  activity  possible  so  long  as 
every  individual  must  supply  all  his  needs  independently?  For 
example,  could  the  distinction  between  farmer  and  hunter,  or  between 
hunter  and  fisherman,  arise  under  such  conditions  ? 

2.  Does  the  domestic  specialization  according  to  which  the 
woman  cooks  and  weaves,  while  the  man  hunts  or  cultivates  the  soil, 
depend  on  exchange  ? 

3.  Can  you  think  of  anyone  today  who  engages  in  every  kind  of 
work  necessary  to  produce  the  commodities  which  he  uses  ? 

4.  Why  can  more  be  produced  when  the  different  operations  are 
divided  among  many  persons  ? 

5.  Do  the  advantages  of  specialization  apply  to  the  use  of  capital 
and  land  as  well  as  to  the  employment  of  labor  ? 

6.  Give  examples  from  your  own  observation  of  (a)  the  division 
of  labor;  {b)  territorial  grouping  of  related  industries;  (c)  territorial 
grouping  of  plants  of  the  same  industry. 

7.  What  were  the  motives  that  led  to  the  specialization  you  have 
mentioned  in  answering  {b)  and  (c)  under  Question  6  ? 

8.  Give  concrete  examples  of  cases  where  specialization  is  limited 
by  the  nature  of  the  industry  itself. 

9.  Can  specialization  be  carried  as  far  in  bicycle  repair  shops  as  in 
bicycle  manufacturing  ?     Why  or  why  not  ? 

10.  Give  examples  of  specialized  occupations  which  are  made 
possible  by  the  degree  of  exchange  co-operation  which  exists  within 
(a)  small  villages;    {b)  towns  of  5,000  inhabitants;    (c)  large  cities. 

11.  Show  specifically  how  specialization  has  depended  on  the 
widening  of  the  market. 


THE   PRODUCTIVE    PROCESS  29 

12.  Is  it  in  general  more  true  that  widening  markets  have  led  to 
specialization,  or  that  the  increased  productivity  of  speciaHzed 
industry  has  enlarged  markets  ? 

13.  Now-a-days  one  machine  completes  the  process  of  pin-making 
which  in  Adam  Smith's  day  occupied  ten  men.  Has  there  been  an 
increase  or  a  decrease  in  specialization  ? 

14.  What  new  forms  of  specialization  and  what  enlargements  of 
the  market  accompanied  the  transition  from  the  handicraft  system 
to  the  factory  system  ? 

15.  Show  how  speciaHzation  of  industry  in  respect  to  (a)  products 
and  (b)  location  is  related  to  the  development  of  transportation. 

16.  Cite  instances  where  social  institutions  affect  the  degree  of 
specialization. 

17.  How  has  the  increasing  economic  freedom  of  women  reacted 
upon  specialization  ?     What  further  changes  may  be  expected  ? 

18.  Show  the  relation  of  financial  organization  to  the  extent  of 
specialization. 

2.  The  Economic  Proportioning  of  the  Productive  Factors 

The  question  of  the  proportioning  of  the  productive  factors  is 
simply  a  question  of  the  law  of  return.  Up  to  the  present  time  the 
law  of  return  has  been  discussed  in  its  application  to  land  alone. 
It  is  now  to  be  noted  that  this  law  is  one  of  general  application.  In 
discussing  it  the  following  distinctions  must  be  considered: 

a)  What  concUtions  are  assumed  as  regards  methods  ? 

i.  Unchanged  methods  (static  laws  of  return) 
ii.  Progress  (dynamic  laws  of  return) 

b)  Are  we  employing  measures  of  number  and  quantity,  or  of 
value, 

i.  As  regards  the  product  ? 
ii.  As  regards  the  producti\e  factors? 

Questions 

1.  A  market  gardener  has  been  cultivating  a  lo-acre  plot  with  the 
aid  of  6  men  and  an  appropriate  outfit  of  tools.  Suppose  that  with 
the  same  land  and  the  same  tools  he  were  to  set  at  work  10,  or  50,  or 
100  men.  Would  the  crop  increase  in  proportion  to  the  increase 
in  the  number  of  laborers?  Would  it  remain  as  before — i.e.,  in  pro- 
portion to  the  unchanged  land  and  tools? 

2.  Supj>ose  the  gardener  continued  to  em])loy  6  men  on  his  land 
but  doubled,  or  increased  a  hundred  fold,  the  equipment  of  tools. 
Would  the  cro])  increase  in  proportion  to  the  increase  in  equipment? 
Would  it   remain  unchanged? 


30  OUTLINES   OF  ECONOMICS 

3.  Suppose  the  gardener  continued  to  employ  6  men  with  the  origi- 
nal outfit  of  tools,  but  increased  his  acreage  to  25,  or  100,  or  1,000 
acres.  Would  the  crop  increase  in  proportion  to  the  increase  of 
acreage  ?     Would  it  remain  unchanged  ? 

4.  Assuming  that  the  gardener  was  originally  cultivating  his  land 
intelligently,  what  should  he  do  to  double  his  crop  ? 

5.  The  phenomenon  of  diminishing  returns  (or  of  increasing 
returns,  as  the  case  may  be)  is  said  to  be  essentially  dependent  on  the 
proportion  of  the  productive  factors.     Explain, 

6.  Devise  an  illustration  of  (a)  increasing  returns  from  a  spinning- 
mill;  (b)  diminishing  returns  from  the  labor  of  stokers  on  a  steam- 
ship. State  the  conditions  of  each  illustration  (i)  without  reference 
to  money  value;    (2)  in  terms  of  money  value. 

7.  Are  diminishing  returns  synonymous  with  reduced  profits  ? 

8.  Is  the  principle  of  diminishing  returns  disproved  by  the  fact 
that  the  per  capita  product  of  industry  is  greater  today  than  two 
hundred  years  ago  ? 

3.  Present  Forms  of  Industrial  Organization 

a)  Forms  of  Business  Organization 

b)  The  Size  of  the  Most  Efficient  Unit 


a)  Forms  of  Business  Organization 
i.  The  Individual  Firm 
ii.  The  Partnership 
iii.  The  Corporation 
iv.  Co-operative  Enterprise  (treated  under  "Social  Reform") 

Questions 

1.  What  are  the  chief  points  of  difference  between  a  corporation 
and  a  partnership  ? 

2.  Why  was  it  that  the  corporation  did  not  become  a  common 
form  of  business  organization  until  the  nineteenth  century?  What 
were  the  usual  forms  of  organization  before  that  time  ? 

3.  What  advantages  has  a  corporation  as  compared  with  a  partner- 
ship ?  Are  there  any  respects  in  which  a  partnership  has  advantages 
not  possessed  by  a  corporation  ? 

4.  What  is  a  holding  company  ?  What  are  the  advantages 
afforded  by  this  form  of  organization?  What  are  its  objectionable 
features  ? 

5.  What  are  the  main  points  of  difference  between  a  share  of 
stock  and  a  bond  ?  Why  is  a  bond  generally  considered  a  safer 
investment  than  a  share  of  stock? 


THE   PRODUCTIVE   PROCESS  31 

6.  Define  common  stock,  cumulative  preferred  stock,  mortgage 
bond,  collateral  trust  bond,  income  bond,  refunding  bond,  coupon 
bond,  registered  bond. 

7.  Where  and  how  does  a  corporation  secure  a  charter?  What 
provisions  does  the  charter  ordinarily  contain  ? 

8.  A  corporation  has  outstanding  $1,000,000  of  5  i)er  cent  bonds, 
$10,000,000  of  7  per  cent  preferred  stock,  and  $10,000,000  of  common 
stock.  Gross  annual  earnings  are  $11,950,000;  total  expenses  for 
the  year  are  $9,900,000,  and  depreciation  of  the  plant  amounts  to 
10  per  cent  on  a  valuation  of  $11,000,000.  What  is  the  amount  of 
net  earnings,  and  how  will  this  amount  be  distributed  among  the 
holders  of  the  different  securities? 

9.  In  the  case  of  the  corporation  described  in  the  preceding 
cjuestion  what  would  be  the  effect  upon  the  di^^dends  on  the  common 
stock  if  all  the  preferred  stock  were  converted  into  5  per  cent  bonds  ? 
Would  this  be  a  wise  move  if  the  business  were  likely  to  fluctuate 
so  that  the  net  earnings  of  the  corporation  would  be  cut  in  half  ? 

10.  In  1896  the  following  situation  existed: 

Dividends 

10  per  cent 

8  per  cent 

10  per  cent 

On  January  i,  1897,  a  holding  company,  D,  absorbs  all  their  stock, 
and  in  1897  U  gets,  in  addition  to  the  former  earnings,  $500,000 
monopoly  profits  and  $100,000  by  saving  the  wastes  of  competition. 
What  dividends  could  D  pay  if  its  capital  stock  were  6,000,000  ? 

b)  The  Size  of  the  Most  Efficient  Unit 

Questions 

1.  Is  it  Hkely  that  large  factories  will  ever  Ije  devoted  to  portrait 
painting?     Give  reasons. 

2.  For  which  of  the  following  articles  is  large-scale  production 
ai)propriate:  hand-made  shoes;  machine-made  shoes;  jewelry; 
nails;   cut  glass;    orchids;    millinery;    mowing  machines? 

3.  Edison  proposes  to  develop  a  method  of  housebuilding  l)y 
l)ouring  cement  into  a  system  of  structural  molds  which  may  be  used 
over  and  over.     Are  such  houses  likely  to  be  in  demand  ?     Why  ? 

4.  Generalizing  your  answers  to  the  preceding  questions,  what 
classes  of  ])ro(lucts  are  likely  to  be  produced  on  a  large  scale  ? 

5.  The  following  are  sometimes  claimed  to  be  advantages  of  large- 
scale  production:  (o)  saving  of  cross-freights;  {b)  running  i^lants  to 
full  cai)acity;    (c)  economies  in  advertising;    {d)  utilization  of  by- 


Company 

Common  Stoclc 

A 

$3,000,000 

B 

2,000,000 

C 

1,000,000 

32  OUTLINES   OF  ECONOMICS 

products;  (e)  sa\ang  in  expenses  of  administration;  (/)  employment 
of  high-grade  technological  experts  and  managers;  (g)  development  of 
foreign  markets;  (h)  use  of  highly  specialized  machinery;  (i)  control 
of  patents;  (j)  maintaining  a  private  insurance-fund.  Classify 
these  alleged  advantages,  showing  the  relation  of  each  to  (i)  large- 
scale  production,  as  attained  in  a  single  large  plant;  (2)  combination, 
i.e.,  unified  control  of  several  plants  in  different  localities;  (3)  monop- 
oly;  (4)  integration  of  industry,  i.e.,  uniting  of  consecutive  processes. 

6.  Are  there  any  disadvantages  in  large-scale  production  ? 

7.  Do  you  understand  that  all  businesses  are  destined  to  become 
large-scale  businesses  ? 

8.  The  gains  due  to  large-scale  production  are  sometimes  called 
"increasing  returns,"  and  on  this  ground  it  has  been  said  that  agri- 
culture is  normally  marked  by  diminishing  returns,  manufacture, 
by  increasing  returns.  Are  the  advantages  named  in  Question  5 
true  instances  of  increasing  returns? 

9.  Give  examples  of  the  integration  of  industry  in  (o)  mining; 
(b)  manufacturing;   (c)  selling. 


4.  Modern  Organization  Exemplified  by  Certain  Industries 

a)  Agriculture 

b)  Transportation 

c)  Manufactures:    Large-Scale  Industry — the  Trusts 

No  attempt  is  made  at  this  point  to  treat  the  conditions  of  modern 
organization  comprehensively.  Agriculture,  railroads,  and  the  trusts 
form  by  no  means  an  exhaustive  list.  Labor  unions,  employers' 
associations,  co-operative  associations,  etc.,  are  also  examples  of 
organization  but  are  reserved  for  discussion  elsewhere.  The  present 
discussion  is  designed  to  cover  merely  a  few  illustrative  cases. 

a)  Agriculture 

This  industry  is  properly  called  one  of  our  basic  industries.  It 
is  the  source  of  most  of  our  food  supply  and  also  of  many  of  our  raw 
materials  for  manufactures.  American  manufacturing  is  in  fact  to 
a  considerable  extent  a  working-up  of  agricultural  produce  into  such 
form  (e.g.,  flour)  as  can  more  economically  be  transported  and  sold 
in  a  wide  market.  In  interpreting  figures  showing  the  value  of  manu- 
factures of  the  United  States  one  should  therefore  remember  that  a 
large  proportion  of  the  total  value  is  to  be  referred  to  the  raw  agri- 
cultural products  which  constitute  the  material  for  manufacture. 


THE   PRODUCTIVE   PROCESS  33 

Questions 

1.  The  rural  population  of  the  United  States  was  87.5  per  cent 
of  the  total  population  in  1850;  83.9  per  cent,  in  i860;  79.1  percent, 
in  1870;  77.4  per  cent,  in  1880;  70.8  per  cent,  in  1890;  and  66.9 
per  cent,  in  1900.  What  is  the  reason  for  the  decline?  Do  the 
figures  show  an  absolute,  or  only  a  relative  falling  off  of  rural  popu- 
lation ? 

2.  What  causes  make  it  possible  for  the  percentage  of  our  popula- 
tion engaged  in  agriculture  to  decrease  steadily  ? 

3.  Why  have  many  people  left  the  farms  for  other  pursuits?  Is 
this  migration  likely  to  continue? 

4.  What  reasons  can  you  assign  for  the  fact  that  large-scale 
production  is  not  a  characteristic  of  this  industry  ?  Do  you  think  that 
the  scale  is  Hkely  to  be  increased  in  the  future  ? 

5.  Agricultural  experts  tell  us  that  by  using  present  amounts  of 
labor,  land,  and  capital  according  to  the  most  efi&cient  plans  of  agri- 
cultural organization  already  known,  the  productive  efficiency  in 
this  industry  could  be  doubled  in  a  year.  Why  is  this  not  done? 
What  forces  are  making  in  this  direction  ? 

6.  Do  you  think  the  forces  of  custom,  habit,  and  inertia  are 
stronger  in  agriculture  than  in  other  pursuits  * 

7.  What  do  you  think  the  agricultural  colleges  accomplish  in  the 
improvement  of  agricultural  methods  ? 

8.  Explain  why  land  that  sold  for  $2  per  acre  when  it  would  pro- 
duce 75  bushels  of  corn,  now  sells  for  $100  per  acre  when  it  produces 
only  40  bushels.  If  this  is  characteristic  of  our  agricultural  land,  has 
this  natural  resource  increased  or  decreased  ? 

9.  When  good  means  of  transportation  opened  up  markets  for 
the  produce  of  the  western  pioneers,  what  changes  took  place  in 
agricultural  organization  ? 

10.  Under  what  conditions  are  we  apt  to  have  diversified  farming  ? 
single-crop  farming  ? 

11.  Can  you  say  whether  the  tendency  of  American  farming  is 
toward  or  away  from  extreme  specialization  ? 

12.  Give  examples  of  the  "integration  of  industry''  in  agriculture. 

13.  Why  were  there  no  big  bonanza  farms  when  the  Middle 
West  was  first  settled  ?  Why  did  they  appear  later  ?  Why  are  they 
being  broken  up  today  ? 

14.  Why  is  agriculture  in  Europe  more  intensive  than  in  the  United 
States  ? 

15.  What  inventions  and  innovations  have  improved  the  con- 
ditions of  farm  life  in  recent  years  ? 


34  OUTLINES   OF  ECONOMICS 

b)  Transportation 

i.  Transportation  in  General 
ii.  Railroad  Transportation 


i.  Transportation  in  General 

Questions 

1.  Mention  commodities  in  the  production  of  which  transportation 
is  the  chief  factor.  Can  you  think  of  commodities  in  the  production 
of  which  transportation  is  insignificant  ? 

2.  Bituminous  coal  which  costs  roughly  $i  per  ton  at  the  mines 
in  southern  Illinois  costs  about  $2  at  Chicago.  The  superior  coal  of 
West  Virginia,  which  costs  $1  or  slightly  less  at  the  mine,  sells  for 
about  $3  in  Chicago.  How  do  you  explain  this  enhancement  of  price  ? 
What  does  it  suggest  with  reference  to  the  location  of  industry  ? 

3.  Enumerate  as  many  as  possible  of  the  means  used  for  the 
transportation  of  goods  in  this  country. 

4.  Describe  the  methods  of  transportation  involved  in  converting 
a  spruce  tree  into  news-print  paper  and  delivering  the  newspaper 
at  your  door. 

5.  A  package  of  goods  is  shipped  from  London  to  Chicago.  The 
freight  charges  are :  for  the  ocean  transportation  from  London  to  New 
York,  $2,  and  for  railroad  transportation  from  New  York  to  Chicago, 
$1.  But  the  consignee  pays  50  cents  for  cartage  in  New  York  and 
50  cents  for  delivery  in  Chicago,  and  gives  25  cents  to  the  porter  who 
carries  the  package  upstairs  at  the  destination.  Why  is  it  necessary 
to  pay  nearly  a  third  of  the  total  expense  for  carrying  the  goods  a 
thousandth  part  of  the  total  distance  ? 

6.  Before  the  Erie  Canal  was  constructed,  the  hauling  of  a  ton 
of  wheat  over  the  roads  from  Buffalo  to  New  York  cost  $100.  As 
facilities  for  transportation  impro\-ed  it  was  found  that  a  horse  could 
draw  on  a  turnpike  three  times  the  load,  and  in  a  canal-boat  twenty- 
five  times  the  load  which  he  could  draw  on  ordinary  earth  roads. 
Today  steam  transportation  permits  the  profitable  shipment  of  wheat 
from  the  far  West  to  Liverpool.  Why  do  earth  roads  and  horse- 
drawn  canal  boats  continue  to  be  used  ? 

7.  What  accounts  for  the  present  revival  of  interest  in  waterways 
in  this  country  ? 

S.  How  has  the  develojiment  of  transportation  methods  in  general 
influenced  (a)  the  scale  of  industry  ?  (b)  specialization  ?  (c)  distri- 
bution and  concentration  of  population  ? 

9.  Are  local  famines  likely  to  be  as  serious  in  the  future  as  they 
have  been  in  the  past  ? 


THE  PRODUCTIVE   PROCESS  35 

ii.  Railroad  Transportation 

.  (a)  The  Development  of  Railroad  Transportation 

(b)  Characteristics  of  the  Railroad  Industry 

(c)  Railroad  Rates 

(a)  The  Development  of  Railroad  Transportation 

Questions 

1.  Show  how  the  development  of  railroad  transportation  in  the 
United  States  has  been  influenced  by  (a)  the  inventions  of  the  multi- 
tubular boiler  and  the  forced  draft;  {b)  coal  supply;  (c)  cheapened 
production  of  steel. 

2.  The  early  railroad  construction  in  this  country  was  of  a  flimsy 
and  temporary  character.  Has  that  fact  hindered  or  aided  advance 
in  railway  methods  ? 

3.  Illustrate  by  examples  the  effect  of  the  following  factors  on 
the  location  of  railroads:  (a)  watercourses;  (b)  mountains;  (c)  cli- 
matic conditions;  ((^)  seaports. 

4.  Have  American  railroads  in  general  followed  or  directed  the 
course  of  settlement  of  the  country  ? 

5.  What  was  the  "Whiskey  Rebellion"  ?  If  railroads  had  existed 
at  the  time  would  it  have  occurred  ? 

6.  Has  railroad  transportation  relieved  or  aggravated  the  problem 
of  great  cities  ? 

7 .  Has  the  American  railroad  in  greater  degree  benefited  the  Dakota 
farmer  or  the  London  consumer  ? 

8.  The  efflciency  of  modern  railroad  transportation  is  attested 
by  the  example  of  a  certain  American  railroad  which  is  said  to  haul 
freight  at  an  average  cost  of  one  mill  per  ton-mile.  Should  you  regard 
it  as  worth  your  while  to  carry  a  ton  of  goods  a  mile  for  a  tenth  of  a 
cent  ?     How  is  the  railroad  able  to  do  it  ? 

(b)  Characteristics  of  the  Railroad  Industry 

Questions 

1.  Is  the  importance  of  capital,  as  contrasted  with  labt)r,  greater 
or  less  in  the  railway  industry  than  in  industry  in  general  ? 

2.  Is  the  capital  of  railroads  predominantly  fixed  or  circulating  ? 
specialized  or  free  ? 

3.  Railway  comi)etition  assumes  a  great  variety  of  forms.  Show 
how  the  business  of  a  railroad  might  be  threatened  by  the  competi- 
tion of  (a)  a  parallel  railway  line;    {b)  a  roundabout  railway  route; 


36  OUTLINES   OF   ECONOMICS 

(c)  ocean  navigation;    (d)  inland  waterways;    (e)  rival  inland  cities; 
(/)  rival  seaports. 

4.  Can  a  railroad  readily  withdraw  from  a  region  in  which  com- 
petition has  become  too  severe  ? 

5.  What  advantages  do  railroads  derive  from  (a)  large  scale  of 
operation,  as  such  ?  (b)  combination  of  parallel  Unes  ?  (c)  con- 
solidation of  connecting  lines  ?     (d)  control  of  terminals,  docks,  etc.  ? 


(c)  Railroad  Rates 

The  problem  of  the  determination  of  railroad  rates — i.e.,  the  prices 
charged  for  the  services  of  railroads — is  here  presented  for  discussion 
before  the  subject  of  price-determination  in  general  has  been  reached. 
The  principle  that  the  price  of  any  service  rendered  bears  a  relation 
to  what  it  costs  to  render  the  service  is  assumed  in  several  of  the 
questions  that  follow.  This  principle,  which  will  be  investigated 
and  established  in  the  subsequent  treatment  of  value  and  price,  is 
probably  so  famiUar  that  no  serious  difficulty  will  be  caused  by 
assuming  it  here. 

Questions 

1.  If  a  railroad  between  New  York  and  Chicago  is  already  in 
existence  and  trains  are  running,  what  added  cost  would  the  railroad 
incur  if  it  hauled  a  five-pound  box  from  Chicago  to  New  York  ? 

2.  Would  it  be  good  business  policy  for  the  road  to  haul  such  a 
box  at  a  rate  only  a  little  in  excess  of  this  added  cost  if  it  could  get 
no  more  for  the  service  ?  Would  it  be  good  poHcy  to  haul  all  trafiic 
at  such  rates  ? 

3.  Suppose  empty  cars  were  being  hauled  in  a  certain  direction. 
Would  a  railroad  be  justified  in  offering  to  haul  traffic  in  that  direction 
at  very  low  rates  ?  If  so,  under  what  circumstances  ?  If  not,  why 
not  ?  Would  your  answer  be  the  same  from  a  social  point  of  view  as 
from  the  point  of  view  of  the  railroad  management  ? 

4.  Explain  the  distinction  between  direct  cost  and  indirect  cost. 
Can  you  think  of  any  circumstances  under  which  it  would  be  wise 
(a)  from  the  railroad's  point  of  view,  (b)  from  the  social  point  of  view, 
for  a  railroad  to  charge  less  than  direct  cost  ? 

5.  In  the  following  analytical  table  of  railroad  expenses  (dividend 
payments  not  considered)  the  figures  of  column  III,  showing  the  per- 
centage of  total  expenses  chargeable  to  each  specified  class  of  expendi- 
tures, are  divided  in  such  a  way  as  to  indicate  how  much  in  each 
instance  must  be  paid  out  regardless  of  the  volume  of  traffic  (column 
I)  and  how  much  bears  a  relation  to  the  volume  of  traffic  (column  II). 


THE   PRODUCTIVE   PROCESS 


37 


I 

II 

III 

Independent 
of  Volume 
of  Traffic 

Dependent 
on  Volume 
of  Traffic 

Total 

Fixed  expenses 

25 

o 

25 

General  operating  expenses 

3 

lO 

7 
14 

34 

o 
6 

7 

28 

41 

3 
i6 

Maintenance  of  way  and  structures 

Maintenance  of  equipment 

14 

42 

•  75 

Conducting  transportation 

Total  operating  expenses 

Total 

59 

41 

From  a  study  of  the  above  table  should  you  expect  a  railroad  to 
fight  strenuously  (a)  to  keep  traffic  ?  (b)  to  gain  new  traffic  ?  Why 
do  you  answer  as  you  do  ? 

6.  Show,  by  the  data  of  the  above  table,  that  the  railroad  might 
be  wise  in  charging  only  42  per  cent  of  the  total  cost  of  hauHng.  If  it 
did  so,  would  that  mean  that  some  other  traffic  would  be  charged 
unduly  to  make  up  for  it  ? 

7.  Sometimes  it  is  argued  that  not  cost  of  transportation  but  the 
value  of  the  service  rendered  by  transportation  should  determine  the 
rate.     How  is  the  value  of  the  serxnce  to  be  determined  ? 

8.  Work  out  a  concrete  case  in  which  "cost  of  ser\dce"  gives  no 
guidance  in  rate-making.  Do  the  same  with  reference  to  "value  of 
service." 

9.  What  do  you  think  of  the  suggestion  that  railway  rates  should 
be  arbitrarily  made  proportional  to  the  value  of  the  commodity 
carried,  rather  than  to  the  enhancement  of  value,  or  to  the  cost,  due 
to  transportation  ?  Could  cheap  and  bulky  goods  be  carried  at  such 
rates  without  loss  ? 

10.  Formulate  a  statement  of  what  "charging  what  the  traffic 
will  bear"  means. 

11.  Rates  on  California  and  Florida  fruits  are  made  such  as  to 
enable  these  fruits  to  compete  even  in  each  other's  territory.  How 
can  this  be  done  ? 

12.  Rates  on  California  lemons  are  made  so  low  that  they  can 
compete  with  lemons  from  Sicily.  Lumber  from  Oregon  competes 
in  Boston  with  lumber  from  Maine.     How  can  this  be  done  ? 

13.  Does  the  j)ractice  of  cjuoting  such  rates  benefit  (a)  the  fruit- 
grower and  the  lumberman  ?  (b)  the  consumer  ?  (c)  the  railroad  ? 

14.  A  certain  railroad  runs  between  two  seaboard  cities  which  are 
also  connected  by  competing  railway  and  steamship  lines.     Between 

59231 


38  OUTLINES   OF  ECONOMICS 

intermediate  points  on  its  own  line  it  has  a  monopoly  of  the  freight 
traffic.  Under  these  circumstances  might  it  actually  charge  more  for 
the  short  haul  between  two  intermediate  points  than  for  the  longer 
haul  between  the  terminal  cities  ?  Why  ?  Is  such  charging  of  higher 
rates  for  the  shorter  haul  objectionable  ? 

15.  Suppose  you  were  a  traffic  manager  and  a  shipper  came  to 
you  with  a  commodity  recently  brought  into  market,  asking  you  to 
name  a  rate.     What  conditions  should  you  need  to  take  into  account  ? 

16.  What  is  meant  by  discrimination  in  rate-making?  Describe 
as  many  forms  of  discrimination  as  you  can  think  of. 

17.  Is  there  any  objection  to  the  practice  of  selling  goods  cheaper 
in  large  quantities — e.g.,  cigars  at  10  cents  each,  3  for  a  quarter? 
Is  it  wrong  for  a  railroad  to  sell  a  monthly  commutation  ticket  at 
less  than  thirty  times  the  single-trip  rate  ?  Why  is  it  wrong  for  a 
railroad  to  c^uote  special  rates  to  a  corporation  which  agrees  to  make 
large  and  regular  shipments  ? 

18.  The  cost  of  transportation  is  often  an  almost  negligible 
element  of  the  total  cost  of  an  article.  For  example,  the  transporta- 
tion-cost of  assembling  at  St.  Louis  the  materials  for  a  pair  of  shoes 
is  I J  cents;  and  the  average  cost  of  shipping  the  finished  shoes  to 
their  destination  is  from  2  to  3  cents  per  pair.  In  such  a  case  is  it 
worth  while  to  question  whether  the  railroad  rate  is  reasonable  or 
not  ? 

19.  State  the  principal  provisions  of  the  Interstate  Commerce 
Act  and  its  amendments. 

20.  It  has  been  said  that  the  most  serious  defect  of  the  Interstate 
Commerce  Act  is  the  attempt  to  prohibit,  at  one  and  the  same  time, 
discriminations  and  pooling.     Explain. 

21.  If  the  competition  of  railroads  were  unqualified  by  open  or 
secret  agreements  to  maintain  rates,  would  competition  by  itself 
be  sufficient  to  assure  reasonable  railway  rates? 

22.  Why  does  the  competition  of  railroads  so  often  force  them  into 
receiverships  and  reorganization  ? 

23.  Are  the  economic  problems  of  the  railroad  business  essentially 
different  from  the  problems  of  any  modern  industry  in  which  indirect 
costs  make  up  a  large  part  of  total  cost  ? 

c)  Manufactures:  Large-Scale  Industry — the  Trusts 

i.  The  Origin  of  the  Trust  Problem 
ii.  The  Trust  Movement  in  the  United  States 
iii.  The  Promotion  and  Organization  of  a  Trust 
iv.  Analysis  of  the  Causes  of  the  Growth  of  Trusts  and  the  Results 

of  the  Trust  Organization 
V.  The  Lines  of  Procedure  in  Dealing  with  the  Trust  Problem 


THE   PRODUCTIVE   PROCESS  39 

i.  The  Origin  of  the  Trust  Problem 

Monopolies  of  one  form  or  another  have  existed  from  the  earliest 
times,  but  the  present-day  trust  and  the  problems  to  which  it  gives 
rise  are  essentially  modern.  The  industrial  world  is  always  changing 
- — ^is  in  a  constant  process  of  evolution. '  The  changes  in  the  industrial 
world  have  been  taking  place  so  rapidly  that  our  laws,  business 
ethics,  and  social  institutions  have  fallen  behind  and  have  become 
antiquated.  The  consequent  maladjustment  is  the  cause  of  many  of 
our  present-day  economic  problems — among  others,  the  trust  problem. 

Fundamentally  the  trust  is  the  product  of  that  stage  in  the  evolu- 
tion of  industrial  society  which  ushered  in  what  is  commonly  called 
modern  capitalistic  industry.  The  movement  began  in  England, 
where  it  became  known  as  the  Industrial  Revolution,  and  later, 
through  a  slow  evolution  rather  than  revolution,  spread  to  the  other 
more  advanced  nations.  Improvements  in  transportation  and  many 
mechanical  inventions  worked  together  to  bring  in  the  factory  system, 
with  a  constantly  enlarging  scale  of  production  and  ever-increasing 
severity  of  competition.  The  characteristics  of  this  capitalistic 
industry  were  first  revealed  in  the  railroad  business,  but  soon  they 
appeared  in  other  industries.  Among  the  more  important  of  these 
characteristics  are  the  following: 

a)  The  corporation,  which  facilitated  the  gathering  together  and 
direction  of  the  vast  sums  of  capital  now  rccjuired  for  successful 
business  undertaking,  became  the  dominant  form  of  business  organiza- 
tion. Under  the  corporate  form  of  organization  there  appears  a 
growing  separation  between  investors  and  those  who  control  the 
investment,  thus  affording  the  latter  opportunity  for  manipulation, 
"high  finance"  methods,  etc.  This  is  especially  marked  in  the 
holding  company — the  most  common  form  of  organization  among 
the  trusts. 

b)  Localization  of  industry  became  more  and  more  marked  with 
the  greater  division  of  labor. 

c)  Integration  of  industry  went  hand  in  hand  with  larger  scale  of 
production. 

(/)  Fierceness  of  competition  increased  as  the  size  of  a  concern 
expanded  and  the  number  of  rivcils  decreased. 

e)  Centralization  of  control  was  hastened  by  the  growing  severity 
of  competition  and  the  hope  of  saving  its  attendant  wastes,  and  of 
gaining,  in  addition,  monopoly  profits. 

Out  of  these  conditions  came  the  modern  trust. 

Questions 

I.  Explain  carefully  why  each  of  these  characteristics  of  modern 
capitalistic  industry  should  lead  to  the  growth  of  trusts. 


40  OUTLINES  OF  ECONOMICS 

2.  What  is  a  trust? 

3.  Are  all  trusts  monopolies?  Are  all  monopolies  trusts?  Is  a 
trust  necessarily  a  corporation  ?  a  partnership  ?  an  association  ? 

ii.  The  Trust  Movement  in  the  United  States 

The  trust  movement  in  the  United  States  may  be  divided  into 
three  periods  according  to  the  form  of  organization  which  dominated 
in  each:  1870-80,  pools;  1880-90,  trusts  (trustee  control);  1890-  , 
corporations,  holding  companies. 

Up  to  1897  the  number  of  trusts  was  comparatively  small.  Most 
of  the  existing  trusts  were  formed  between  1898  and  1902,  when 
industrial  and  financial  conditions  were  especially  favorable  to  their 
formation.     Since  1902  the  movement  has  been  much  slower. 

Questions 

1.  What  is  a  pool?  a  trust  (in  the  original  sense  of  the  term)? 
a  holding  company  ? 

2.  Why  were  the  pool  and  the  trust  abandoned  and  the  holding 
company  adopted  ? 

3.  Is  the  movement  toward  combination  still  going  on?  Is  it 
hkely  to  continue  in  the  future  ? 

iii.  The  Promotion  and  Organization  of  a  Trust 

Questions 

1.  What  is  the  function  of  a  promoter? 

2.  Explain  the  steps  by  which  a  trust  is  organized. 

3.  What  is  meant  by  the  capitalization  of  a  trust? 

4.  What  is  meant  by:  (a)  capitalization?  (b)  capitalization  on 
the  basis  of  original  cost  of  production  ?  (c)  capitalization  on  the  basis 
of  cost  of  reproduction  ?  (d)  capitalization  on  the  basis  of  earning 
capacity  ?  (e)  capitalization  on  the  basis  of  expected  earning  capacity  ? 
(/)  capitalization  on  the  basis  of  cash  contributed?  (g)  capitalization 
on  the  basis  of  tangible  assets  ? 

5.  What  is  stock-watering?  Why  is  it  resorted  to?  Is  it  prac- 
ticed only  by  the  trusts  ? 

6.  Does  stock-watering  harm  the  public  ?  the  investor  ?  the 
creditor  ? 

7.  What  difference  is  there  between  the  act  of  a  corporation 
which  floats  stock  at  par  with  a  capitalization  based  on  earning 
capacity,  and  the  act  of  an  individual  who  sells  a  prosperous  business 
at  a  high  figure  because  of  its  being  prosperous  ? 


THE  PRODUCTIVE   PROCESS  41 

8.  Would  the  evils  of  stock-watering  be  prevented  by  full  pub- 
licity ? 

g.  Exjiliiin  the  work  of  the  underwriter. 

iv.  Analysis  of  the  Causes  of  the  Growth  of  Trusts  and  the  Results  of 
the  Trust  Organization 

The  main  causes  of  the  growth  of  trusts  may  be  stated  as — 

a)  The  advantages  of  large-scale  production. 

b)  The  prospect  of  obtaining  exorbitant  monopoly  profits 
(i)  By  control  of  selling  price 

(2)  By  superior  strategic  position  in  bargaining,   e.g.,   with 
the  seller  of  material  or  with  labor,  etc. 

c)  The  saving  of  the  wastes  of  competition,  e.g.,  the  better 
adjustment  of  production  to  demand,  saving  in  advertising, 
etc. 

The  following  have  been  minor  causes: 

d)  Special  privileges,  e.g.,  railway  rebates,  tariff  favors,  patent 
rights,  etc. 

e)  Methods  of  competition,  e.g.,  factor  agreements  and  discrimi- 
nating prices. 

/)   Promoters'  profits,  made  in  organizing  trusts. 

Questions 

1.  The  following  classification  of  monopolies  has  been  made  by 
Bullock: 

a)  Personal  abiUties 
h)  Legal  monopolies : 

(i)  Private,  as  patents,  copyrights,  etc. 

(2)  Public,  as  postal  business,  fiscal  monopolies,  etc. 

c)  Natural  monopoHes: 

(i)  Control  of  raw  material. 

(2)  Consumption  limited  to  locality  of  the  i)lant,  e.g.,  gas, 
railways,  etc. 

d)  Ca])italistic  monopolies,  agreements,  pools,  etc. 

Does  this  classification  satisfy  you?  Can  you  give  an  exami)]e  of 
each  kind  of  nionojjoly  here  distinguished?  Might  it  be  contended 
that  capitalistic  trusts  are  "natural"? 

2.  "The  trust  is  efficient  from  the  social  point  of  view."  Why  or 
why  not  ? 

3.  What  are  the  chief  adxanlages  of  large-scale  i)roduction  ? 
What  are  the  wastes  of  competition  which  can  be  saved?  Are  either 
of  these  gains  to  lie  obtained  without  monopoly? 


42  OUTLINES   OF  ECONOMICS 

4.  "The  trust  carries  the  germ  of  its  own  destruction.  The  alleged 
advantages  of  large-scale  production  are  fictitious  and  the  savings 
of  the  wastes  of  competition  are  more  than  offset  by  the  wastes  of 
monopoly.  Abolish  special  privileges  and  improper  methods  of 
competition  and  the  trust  will  die  of  itself."  Do  you  agree?  Why 
or  why  not  ? 

5.  Is  the  tariff  the  "mother  of  trusts"?  To  what  extent  is  it 
responsible  for  the  trusts  ? 

6.  Would  the  abolition  of  the  tariff  destroy  trusts  or  result  in 
the  formation  of  international  trusts  ? 

7.  What  forms  may  a  railroad  rebate  take?  In  what  way  does 
it  foster  trusts  ? 

8.  Certain  of  the  trusts  allow  an  extra  discount  from  the  prices 
of  their  products  to  retailers  who  agree  not  to  sell  the  goods  of  any 
other  manufacturer.  Is  this  practice  of  "factor  agreements"  objec- 
tionable ?     Why  ? 

g.  How  does  the  practice  of  discriminating  prices  favor  trusts  ? 
Is  this  practice  confined  to  the  trusts  ? 

10.  Do  trusts  tend  to  raise  prices?  By  what  methods  can  this 
be  determined? 

11.  How  do  trusts  affect  the  position  of  the  laborer  in  bargaining 
for  the  sale  of  his  labor  ? 

12.  Are  there  social  or  political  evils  which 'follow  from  the  growth 
of  trusts  ? 

V.  The  Lines  of  Procedure  in  Dealing  with  the  Trust  Problem 

Questions 

1.  Enumerate  the  evils  for  which  the  trusts  can  be  held  respon- 
sible. 

2.  What  elements  of  good,  if  any,  do  you  see  in  the  trusts? 

3.  Under  the  circumstances  should  the  trusts  be  abolished,  be 
let  alone,  or  be  regulated  ? 

4.  What  has  been  the  policy  underlying  the  trust  legislation  of 
this  country  in  the  past,  and  what  has  been  accomplished  ? 

5.  Why  has  not  more  been  accomplished?  Was  the  policy  a 
wise  one  ? 

6.  What  can  be  accomplished  by  potential  competition  ?  Do  you 
think  potential  competition  is  an  adequate  solution  of  the  problem  ? 

7.  What  other  remedies  have  been  suggested?  Do  you  believe 
them  to  be  adequate  ? 

8.  Do  you  think  it  would  be  wise  to  attempt  to  regulate  the  trusts 
by  methods  analogous  to  those  used  in  regulating  the  railroads  ? 


THE   PRODUCTIVE   PROCESS  43 

9.  If  you  were  to  atttmpt  to  regulate  the  trusts  in  such  a  way 
as  to  strike  at  the  special  causes  of  the  special  evils  to  which  they 
give  rise,  what  remedies  should  you  suggest? 

10.  May  any  of  the  evils  of  "high  finance"  commonly  attributed 
to  the  trusts  be  more  properly  regarded  as  characteristic  of  corpora- 
tions as  such  ?     If  so,  which  ? 

11.  What  remedies  should  you  suggest  for  some  of  these  evils 
of  corporations  ? 


E.     EXCHANGE 

I.  Markets 

II.  Value 

III.  The  Mechanism  of  Exchange 

IV.  International  Trade 


We  have  seen  that  the  modern  industrial  society  is  an  exchange 
society.  In  this  section  we  shall  study  the  exchange  processes  in  more 
detail,  or,  speaking  more  accurately,  we  shall  study  industrial  society 
with  especial  reference  to  exchange.  There  is,  of  course,  no  clear 
line  of  demarkation  between  exchange  and  the  productive  process; 
for  the  production  of  a  good  is  not  complete  until,  through  exchange, 
it  is  brought  to  the  consumer,  and  has  attained  its  full  utilities  of 
time  and  place.  Nor  are  exchange  and  the  distributive  process 
strictly  separable.  With  such  intricate,  interacting,  and  complex 
phenomena  it  is,  however,  good  scientific  method  to  take  first  one 
point  of  view  and  then  another,  and  finally  to  seek  to  deal  with  the 
matter  as  a  whole. 

I.  Markets 

We  have  come  to  assume  ''market"  as  a  factor  in  our  industrial 
life.  We  make  goods  "for  the  market";  we  "go  to  market";  we 
"study  the  market";  we  speak  of  "making  a  market"  or  "spoiHng 
the  market."  These  expressions  could  be  multiplied  indefinitely. 
We  must  consider  precisely  what  the  term  "market"  means. 

Questions 

1 .  When  people  congregate  at  a  certain  place  and  exchange  goods 
by  barter,  can  we  say  that  they  constitute  a  market  ? 

2.  When  you  buy  chickens  from  a  farmer  out  in  the  country  are 
you  buying  in  a  market  ?  If  so,  what  constitutes  the  market  ?  Is  it 
the  place  ?  the  operation  ? 

3.  Is  the  retail  grocery  store  a  market?  For  whom?  Is  the 
place  the  market  ? 

4.  Is  the  wholesale  grocery  store  a  market  ?  For  whom  ?  Is  the 
place  the  market  ?  Suppose  this  wholesale  grocery  has  no  stock  on 
hand  but  consists  merely  of  an  office,  an  office  force,  and  means  of 

44 


EXCHANGE  45 

communication  with  importers  and  producers  and  customers,  is  it  a 
market  ? 

5.  Are  the  office  and  store  of  the  importer  a  market  ? 

6.  When  you  speak  of  the  tea  market  do  you  mean  the  retailers' 
market  ?  wholesalers'  market  ?  importers'  market  ? 

7.  Sometimes  a  distinction  is  made  between  a  local  market  and  a 
world  market.  What  distinction  exists  ?  Can  you  name  any  goods 
which  have  a  world  market  ?  Any  which  have  a  local  market  ? 
Under  what  conditions  will  goods  have  a  local  market  alone  ? 

8.  Is  a  stock  exchange  a  market  ?  Is  a  produce  exchange  ?  If  so, 
for  whom  ? 

9.  Draw  up  a  definition  of  market. 

10.  Show  how  the  market,  as  you  have  defined  it,  has  a  function 
in  the  industrial  world. 

11.  When  we  say  we  "watch  the  stock  market,"  just  what  do 
we  mean  ? 

12.  Where  is  the  market  that  establishes  the  market  price  of 
wheat  ? 


II.  Value 

1.  The  Nature  of  Value  and  Price 

2.  Demand  and  Supply  in  Relation  to  Value 

3.  Normal  Value  and  Normal  Price 

4.  Analysis  of  Demand 

5.  Analysis  of  Supply 

6.  The  Marginal  Utility  Explanation  of  Value 
■    7.  General  Questions  on  Value 


I.  The  Nature  of  Value  and  Price 

The  term  "value"  is  used  in  many  senses.  In  the  sense  of  what 
is  more  specifically  called  "value-in-use"  the  term  is  practically 
synonymous  with  "utility."  Sometimes  the  word  value  is  employed 
with  an  ethical  signification.  But  in  ordinary  economic  usage  value 
always  means  power  in  exchange.  For  the  economist,  the  study  of 
value  is  a  study  of  the  terms  according  to  which  one  commodity  is 
given  for  another,  and  also  a  study  of  the  part  that  value  plays  in  the 
economic  process. 

Price  is  value  expressed  in  terms  of  some  one  good,  ordinarily 
money,  taken  as  a  standard.  In  our  everyday  experience  with 
economic  matters  we  are  more  likely  to  talk  of  price  than  of  value. 


46  OUTLINES   OF   ECONOMICS 

Questions 

1.  "Whiskey  is  not  wealth.  It  has  no  permanent  value  for 
society."     In  what  sense  is  the  term  value  used  ? 

2.  "It  was  a  valuable  lesson  for  me."  In  what  sense  is  the  term 
value  used  ? 

3.  A  mercantile  estabhshment  advertises  "the  best  values  in 
the  city."     What  is  meant  here  by  value  ? 

4.  Could  a  thing  have  value  unless  desired  ?  unless  scarce  ? 

5.  Draw  up  a  sentence  in  which  the  word  value  is  used  in  the  sense 
in  which  the  economist  uses  it. 

6.  Would  a  bag  of  gold  have  value  to  a  shipwrecked  sailor  on  a 
rocky  and  deserted  island  ?     Would  a  loaf  of  bread  ? 

7.  What  good  is  actually  the  standard  in  price  calculations  today  ? 

8.  Just  what  is  a  $5  gold  piece  ?  If  gold  should  go  up  in  value, 
would  the  government  put  a  different  quantity  of  gold  in  the  $5 
piece  ?  If  wheat  should  rise  in  value,  would  there  still  be  60  pounds 
in  the  bushel  ? 

9.  If  gold  became  so  abundant  that  its  value  fell,  what  would 
happen  to  prices  ? 

10.  Could  X  change  in  price  and  still  have  the  same  value  relation 
to  a,  h,  and  c  that  it  had  before  ? 

11.  Can  there  be  a  general  rise  or  fall  of  values  as  the  economist 
uses  the  term  ? 

12.  Can  there  be  a  general  rise  or  fall  of  prices  ? 

13.  If  prices  fall,  is  the  general  wealth  of  the  country  any  less? 
Are  there  as  many  articles  of  value  as  before  prices  fell  ? 

14.  Is  value  an  absolute  property  of  things?  Is  the  expression 
"intrinsic  value"  defensible — 

a)  As  an  expression  meaning  the  value  of  the  substance  of 
which  a  thing  is  made:  e.g.,  "The  intrinsic  value  of  a 
silver  dollar  is  47  cents"  ? 

b)  As  an  expression  signifying  that  value  is  inherent  in  a  thing  ? 


2.  Demand  and  Supply  in  Relation  to  Value 

The  answer  to  the  questions  "Why  does  so  much  of  this  commodity 
exchange  for  so  much  of  that  ?  Why  not  for  more  ?  Why  not  for 
less  ?"  is  to  be  found  in  the  relationship  existing  between  demand  and 
supply. 

Demand  and  supply  are  terms  of  which  the  general  meaning  is 
more  or  less  apparent,  but  which  are  by  no  means  easily  defined  with 
accuracy.  The  detailed  discussion  of  demand  and  supply  is  taken 
up  in  sees.  4  and  5,  below.     Provisionally,  we  may  take  demand  to 


EXCHANGE 


47 


mean  the  quantity  of  a  good  which  will  be  purchased  at  a  given  price, 
and  supply  to  mean  the  quantity  which  will  be  offered  for  sale  at  a 
given  price. 

By  experience  of  market  conditions  one  may  with  some  approach 
to  accuracy  predict  how  many  units  of  a  good  would  be  demanded 
in  a  community  at  each  of  several  possible  prices.  Suppose,  for 
example. 


u 

IOC. 

per 

lb 

.  there 

would  be  taken 

50  lbs. 

9C. 

8c. 

70    " 
100    " 

7c. 
6c. 

150    " 

250    " 

5c. 
4C. 

400    " 
600    " 

3C. 

2C. 

a 

900    " 
1,500    " 

IC. 

(C 

2,500    " 

This  tabular  statement  would  then  constitute  a  demand  schedule. 
If  the  same  data  were  plotted  graphically  they  would  give  a  demand 
curve. 

Again,  suppose  that 


2C. 

3C. 

4C. 

5c- 

6c. 

7c. 

8c. 

9C. 

IOC. 

)e  supplied 

0  lbs 
0    " 

SO    " 

100    " 

I 

400    " 
,000    " 

I 
I 

,Soo    " 
,800    " 

2 

,000    " 

2 

,100    " 

This   tabular  statement   would   constitute   a   supply  schedule.   The 
corresponding  graphic  representation  would  give  a  supply  curve. 

Questions 

T.  Under  the  conditions  of  demand  and  supply  staled  in  the  alcove 
schedules,  at  what  i)rice  per  pound  would  the  (lemand  for  the  com- 
modity be  equal  to  the  supply  ? 

2.  Can  you  estabUsh  that  this  price  is  the  market  price  which 
will  prevail  under  the  assumed  circumstances? 

3.  Show  why,  under  the  assumed  conditions,  the  price  could  not 
be  4  cents  or  6  cents  per  pound. 


48  OUTLINES   OF   ECONOMICS 

4.  Can  there  be  more  than  one  price  for  a  given  commodity  in  the 
same  market  at  the  same  time  ?     Why  or  why  not  ? 

5.  Plot  on  one  piece  of  paper  the  curves  representing  the  conditions 
of  demand  and  supply  tabulated  above,  using  the  same  axes  and  the 
same  scale  for  both  curves.  What  point  is  common  to  the  two  curves  ? 
What  does  this  signify  ? 

6.  Will  doubling  the  demand  for  a  good  double  its  value  ? 
(Doubled  demand  means  demand  for  twice  the  previous  quantity  at 
each  given  price.) 

7.  If  prices  depend  upon  demand  and  supply,  how  is  it  possible 
for  stores  to  have  a  one-price  system? 

3.  Normal  Value  and  Normal  Price 

The  value  which  is  actually  fixed  by  the  competitive  conditions  of 
purchase  and  sale  of  any  commodity  is  called  market  value.  Market 
price  is  market  \'alue  expressed  in  terms  of  money. 

Contrasted  with  this  actual,  observed  market  value  (or  market 
price)  is  normal  value  (or  normal  price) — the  ideal  value  (or  price) 
which  might  a  priori  be  expected  to  prevail  in  the  long  run. 

Normal  value,  in  its  superficial  aspect,  is  an  average  value,  above 
and  below  which  momentary  market  values  fluctuate.  Regarded 
more  analytically,  it  is  a  standard  or  characteristic  value,  typical  for 
a  given  commodity  and  for  the  industrial  and  commercial  conditions 
of  a  given  period,  but  progressi\'ely  changing,  over  longer  periods, 
with  the  drift  of  economic  change.  This  latter  interpretation  of 
normal  value  can  be  more  successfully  taken  up  later  in  connection 
with  "Cost  of  Production." 

Questions 

1.  Cite  instances  where  market  price  remains  the  same  over  con- 
siderable periods  of  time.  Cite  instances  where  market  price  fluctu- 
ates rapidly. 

2.  A  shopkeeper  advertises  fabrics  at  39  cents  a  yard,  ''worth 
75  cents";  umbrellas  at  $1.98,  "value  $3";  and  handkerchiefs, 
"regular  50-cent  ciuality,"  at  3  for  $1.  Can  you  explain  these  state- 
ments in  terms  of  market  price  and  normal  price  ? 

3.  Under  what  circumstances  might  a  flower- vendor  at  a  street- 
corner  sell  flowers  for  less  than  normal  price  ?  Under  what  circum- 
stances might  he  sell  for  more  than  normal  price  ? 

4.  Would  a  bad  crop  affect  the  market  price  of  corn  ?  Would  it 
affect  the  normal  price  ? 

5.  Would  the  following  influences  disturb  (i)  the  market  price, 
(2)  the  normal  price,  of   the  commodities   respectively  concerned: 


EXCHANGE  49 

(a)  Late  frosts  in  a  fruit-growing  region ;  (b)  demand  for  mourning  in 
a  European  capital  following  the  death  of  the  Sovereign;  (c)  a  week 
of  hot  weather  during  an  ice-famine;  (d)  destruction  of  local  timber- 
supply  by  forest  fires ;  (e)  discovery  of  a  method  of  making  artificial 
diamonds,  indistinguishable  from  the  natural  stones  ? 

6.  Why  does  the  price  of  wheat  in  the  United  States  generally 
fluctuate  between  certain  rather  definite  limits  ?  Why  does  it  not 
rise  to  $10  a  bushel  ?  Why  does  it  not  fall  to  10  cents  a  bushel  ? 
Why  does  it  fluctuate  at  all  ? 

7.  Might  farmers  accept  3  cents  a  quart  for  strawberries  some- 
times ?  Do  you  think  they  could  accept  as  little  as  this  for  every 
quart  they  sold  and  still  remain  in  the  business  ? 

8.  Could  normal  price  be  determined  in  the  case  of  a  commodity 
in  the  production  of  which  much  machinery  is  used;  especially  if 
improvements  of  the  machinery  are  being  rapidly  and  continually 
invented  and  applied  in  new  plants  or  in  the  newer  machines  of 
estabHshed  plants  ? 

4.  Analysis  of  Demand 

a)  Meaning  of  Demand 

b)  Determinants  of  Demand 

c)  Certain  Characteristics  and  Special  Forms  of  Demand 

In  sec.  2  above  it  was  seen  that  the  forces  which  determine  \'alues 
and  prices  work  themselves  out  through  demand  and  supply.  The 
further  investigation  of  demand,  and  of  the  forces  which  go  to  make  it 
up,  was  temporarily  deferred.     This  investigation  will  now  be  resumed. 

a)  Meaning  of  Demand 

Questions 

1.  Can  one  speak  of  the  amount  demanded  independent  of  value 
or  price  ? 

2.  Does  mere  desire  for  a  commodity  constitute  demand? 

3.  Does  the  penniless,  hungry  tramp  "exercise  demand"  for 
bread  in  the  bakery  ? 

4.  Does  fictitious  demand  ever  influence  values?  What  are 
"wash  sales"?     Why  do  they  take  place? 

b)  Determinants  of  Demand 

i.  Desire 

ii.  Effectiveness  of  Desire — Purchasing  Ability 
iii.  Persons  Affected 


50  OUTLINES   OF   ECONOMICS 

i.  Desire 

(i)  Individual  Determinants  of  Desire 
(2)  Social  Determinants  of  Desire 

First  of  all,  if  a  good  is  to  be  demanded  it  must  have  utility.  Men 
desire  it  because  it  will  contribute  to  the  satisfaction  of  wants.  We 
must  therefore  in  this  connection  revert  for  a  moment  to  the  subject 
of  the  nature  of  wants.  The  student  should  review  the  questions  on 
"The  Characteristics  of  Wants." 

(i)  Individual  Determinants  of  Desire 

Questions 

1.  Does  the  intensity  of  one's  desire  for  a  unit  of  a  certain  com- 
modity depend  upon  the  number  of  units  one  already  has?     How? 

2.  A  desires  a  tennis  racquet.  So  does  B.  Assuming  that 
neither  has  a  racquet  at  present,  does  it  follow  that  A's  desire  and 
B's  desire  are  equally  intense?  Is  there  any  way  of  telling  which 
desires  the  racquet  more  urgently? 

3.  A  and  B  also  desire  tennis  balls.  Assuming  that  for  three 
tennis  balls  the  desire  of  A  and  the  desire  of  B  would  be  equal,  does 
it  follow  that  A  would  feel  the  same  desire  for  six,  or  for  a  dozen, 
that  B  would  ? 

4.  A  benevolent  person  gives  a  jack-knife  to  each  of  several  small 
boys.  The  jack-knives  are  alike,  but  apparently  some  of  the  boys  are 
much  more  pleased  by  the  gift  than  others.  Reasoning  from  your 
answers  to  Questions  1,2,  and  3,  what  explanations  could  you  suggest  ? 

5.  If  a  wealthy  woman  were  offered  the  choice  between  a  diamond 
and  an  ordinary  loaf  of  bread,  which  would  she  choose  ?  Why  ? 
Are  diamonds  more  necessary  than  bread  ?  Is  it  not  likely  that  the 
woman  in  question  actually  possesses  more  diamonds  than  loaves  of 
bread  at  the  moment  ? 

6.  It  has  been  stated  that  the  desire  which  influences  value  is 
not  the  desire  for  a  commodity,  such  as  bread,  in  general,  but  the 
desire  for  some  particular  unit  of  the  commodity.  Explain  the 
significance  of  this  distinction. 

7.  Is  it  the  real  or  the  supposed  qualities  of  a  good  which  influence 
demand  ? 

8.  How  does  advertising  affect  demand  ?  Does  it  create  new 
desires,  or  make  existing  desires  take  definite  shape? 

(2)  Social  Determinants  of  Desire 

The  influence  of  social  organization  on  methods  of  production  has 
been  pointed  out.     Social  usage  exercises  an  equally  fundamental 


EXCHANGE  51 

influence  on  the  tastes  and  habits  of  consumers,  and  therefore  on  the 
desire  for  goods. 

Questions 

1.  Do  goods  tend  to  be  less  valuable  when  out  of  style?     Why? 

2.  What  distinction  do  you  make  between  necessities  and  luxuries  ? 

3.  Is  good  food  a  necessity?  Is  a  dress  suit  a  necessity?  Does 
a  man  ever  try  to  live  on  less  or  worse  food  than  considerations  of 
health  would  suggest,  in  order  to  buy  a  dress  suit  ?     Why  ? 

4.  Goods  which  are  required  by  social  custom  rather  than  by  the 
necessities  of  physical  existence  are  called  conventional  necessities. 
Give  examples  of  conventional  necessities. 

5.  What  is  the  difference  between  luxuries  and  conventional 
necessities  ?  Can  you  give  examples  of  luxuries  which  have  become 
conventional  necessities  ? 

6.  Will  people  buy  the  same  things  regardless  of  the  neighborhood 
in  which  they  live  or  the  social  circle  in  which  they  move  ? 

7.  Food  and  clothing  as  such  are  usually  reckoned  as  necessities. 
Are  the  actual  forms  of  food  we  eat  and  the  styles  of  clothes  we  wear 
necessities  ?  Can  you  mention  any  article  of  dress  which  is  without 
trace  of  luxury  or  convention?  Try  to  distinguish  necessities  from 
luxuries  and  conventional  necessities  in  a  table  d'hote. 


ii.  Effectiveness  of  Desire — Purchasing  Ability 

Objective  demand  cannot  be  based  upon  desire  alone.  In  an 
exchange  process,  purchasing  ability  or  effectiveness  must  accompany 
the  desire. 

Questions 

1.  Does  purchasing  ability  imply  the  possession  of  that  which  we 
call  money  ? 

2.  What  is  meant  by  saying  that  a  person  can  demand  only 
when  he  supplies  ? 

3.  Can  a  man  be  a  consumer  and  yet  not  be  a  producer? 

4.  Is  a  general  over-production  possible  ? 

5.  "The  destruction  of  wealth  has  one  comjicnsation  in  ihal  it 
increases  demand  for  goods."     Comment. 

6.  "Demand  in  general  would  be  increased  if  employers  would 
raise  wages."  Would  this  increase  the  total  output  of  products? 
Would  it  increase  total  demand?  Would  it  cause  a  different  dis- 
tribution of  demand? 

7.  A  rich  man,  for  recreation,  cultivates  a  vegetable  garden  and 
suppHes  his  own  household  with  vegetables.     Is  he  hkely,  on  this 


52  OUTLINES   OF  ECONOMICS 

account,  to  make  fewer  purchases  (a)  of  the  local  vegetable  dealer  ? 
(b)  of  tradesmen  in  general  ? 

8.  The  daughter  of  a  well-to-do  family,  desirous  of  having  an 
occupation  and  an  independent  source  of  support,  goes  into  the  busi- 
ness of  artistic  bookbinding.  Does  this  work  hardship  for  poor  book- 
binders who  need  money  ?     Does  it  injure  working  people  in  general  ? 

9.  It  is  argued  that  if  articles  produced  by  convict  labor  are  put 
on  the  market,  honest  men  will  be  deprived  of  work.     Comment. 

10.  Does  total  demand  equal  total  money?  If  all  money  were 
wiped  out  of  existence  would  demand  disappear? 

1 1 .  Can  an  individual  buy  more  than  he  sells  in  the  long  run  ? 

12.  The  irrigation  projects  of  the  federal  government  are  opening 
up  for  settlement  large  tracts  of  land  that  were  formerly  desert. 
Will  the  settlement  of  these  tracts  increase  the  demand  for  products 
of  other  parts  of  the  country  ?  How  should  you  proceed  to  determine 
the  extent  of  this  increase,  if  any? 

13.  "Demand  for  a  good  is  made  up  partly  of  the  supply  of  other 
goods."     Why  or  why  not  ? 

14.  It  seems  to  be  clear  that  the  effectiveness  of  a  man's  desire 
depends  (at  least  in  part)  upon  his  ability  to  offer  something  in 
exchange.  Will  it  also  depend  upon  his  willingness  to  offer  this 
something  ?     If  so,  upon  what  will  this  willingness  depend  ? 

15.  Does  advertising  increase  the  aggregate  demand  for  goods  in 
general  or  does  it  merely  cause  a  redistribution  of  demand? 

16.  Is  desire  or  purchasing  ability  the  more  fundamental  factor 
in  demand  ? 


iii.  Persons  Affected 

The  relation  between  the  number  of  persons  affected  and  the  total 
demand  is  really  a  matter  of  the  extent  of  the  market  and  is  so  obvious 
as  to  require  no  extended  treatment.  As  regards  the  different  types 
of  individuals  represented,  and  the  corresponding  variety  of  wants 
and  purchasing  abilities  involved,  the  problem  is  more  complex,  and 
can  here  be  only  briefly  touched  upon. 

Questions 

1.  Construct  a  demand  curve  showing  the  demand  of  a  typical 
family  for  cream. 

2.  How  would  the  form  of  the  curve  be  changed  if  the  demand  of 
10,000  such  families  were  taken  in  the  aggregate  and  the  curve  were 
drawn  to  the  same  scale  as  before  ? 

3.  Draw  up  three  different  schedules  of  individual  demand  for 


EXCHANGE  53 

candles.     Plot  a  curve  representing  the  aggregate  demand  of   the 
three  schedules.     Interpret  the  result. 

Note. — A  schedule  or  curve  of  aggregate  demand  represents  the  total  demand 
at  different  prices  for  a  given  commodity  in  a  given  community  or  market.  If 
the  figures  showing  aggregate  demand  in  the  schedule  are  divided  by  the  number 
of  individual  schedules  fused  together;  or  if  the  horizontal  scale  of  the  curve 
(representing  quantity  demanded)  is  reduced  in  corresponding  proportion,  the 
result  will  in  either  case  be  a  sort  of  average  individual  demand  schedule  from 
which  the  idiosyncrasies  of  the  actual  individual  schedides  are  eliminated.  But 
such  an  average  does  not  represent  any  real  instance  of  demand,  and  cannot 
properly  be  used  to  exemplify  diminishing  utilit}'  or  elasticity  of  demand  (see 
below),  independent  of  other  factors. 

c)  Certain  Characteristics  and  Special  Forms  of  Demand 

i.  Elasticity  of  Demand 

ii.  Alternative  Demand:  The  Principle  of  Substitution 
iii.  Derived  Demand 
iv.  Composite  Demand 

V.  Joint  Demand 


i.  Elasticity  of  Demand 

Demand  may  be  elastic  or  inelastic,  i.e.,  the  amount  demanded 
may  change  readily  or  slowly  with  change  of  price. 

Questions 

1.  Does  the  principle  of  diminishing  utility  manifest  itself  more 
markedly  in  the  case  of  some  goods  than  in  the  case  of  others  ?  Give 
specific  instances. 

2.  Is  elasticity  of  demand  associated  with  gradual  or  with  abrupt 
diminution  of  utility  as  the  amount  of  the  good  consumed  is  increased  ? 

3.  Is  the  demand  for  the  following  elastic  or  inelastic:  diamonds, 
salt,  tobacco,  beef,  shoes,  manual  labor  ? 

4.  If  hearses  were  to  fall  in  price  would  there  be  an  increase  in 
the  number  demanded  ? 

5.  Is  the  demand  for  water  elastic  or  inelastic  when  the  water  is 
desired  for  (a)  drinking  ?  (b)  cooking  ?  (c)  washing  ?  {d)  watering 
the  lawn  ?  (e)  running  a  water-motor  ? 

6.  May  the  demand  for  a  given  commodity  be  elastic  at  one  price- 
level  and  inelastic  at  another?     Illustrate. 

7.  Draw  up  schedules  illustrating  elastic  and  inelastic  demand. 
Plot  them. 

8.  Is  demand  elastic  in  the  case  of  a  commodity  which  is  so  cheap 
that  the  users  are  near  the  point  of  satiety? 

9.  Name  some  familiar  commodity  the  elasticity  of  the  demand 


54  OUTLINES   OF  ECONOMICS 

for  which  varies  markedly  according  as  the  purchaser  is  wealthy, 
poor,  or  of  moderate  means.  Illustrate  this  phenomenon  by  con- 
structing three  demand  curves,  representing  the  character  of  the 
demand  of  the  wealthy,  the  poor,  and  the  moderately  well-to-do, 
respectively. 

10.  Does  advertising  affect  elasticity  of  demand? 

11.  Draw  up  a  series  of  general  statements  or  propositions  defining 
the  circumstances  under  which  demand  will  be  elastic. 

12.  Suppose  a  sudden  doubling  of  the  amount  of  all  kinds  of 
goods  (by  a  miracle,  if  you  choose).     Would  values  be  affected? 

ii.  Alternative  Demand:  The  Principle  of  Substitution 

Questions 

1.  Name  some  want  that  can  be  supplied  equally  well  by  two 
different  commodities. 

2.  Does  the  availabiUty  of  a  satisfactory  substitute  ever  affect 
the  desire  for  a  good?     Give  examples. 

3.  Is  any  one  article  of  food  a  necessity  of  Hfe  so  long  as  other 
kinds  of  food  may  be  had  ? 

4.  How  does  this  principle  affect  (a)  the  utility  of  the  first  unit 
of  any  given  good  ?  (b)  the  diminishing  utility  of  successive  units  ? 

5.  Does  elasticity  of  demand  depend  upon  the  ease  with  which 
one  commodity  may  be  substituted  for  another? 

6.  Would  the  high  price  of  meat  affect  the  consumption  of  other 
kinds  of  food  ?  If  the  tariff  on  woolens  were  removed,  would  other 
kinds  of  clothing  lose  their  present  market  ?  If  barley  should  rise  in 
price  would  more  corn  be  used  than  formerly  ? 

7.  If  a  field  is  well  suited  to  wheat-growing,  and  only  passably 
good  for  oats,  are  there  conditions  under  which  it  will  be. devoted 
to  oats  ? 

8.  Is  there  any  substitute  for  physical  labor?  for  mental  labor? 

9.  If  labor  in  China  rose  to  $1.50  a  day  the  demand  for  capital 
would  be  Ukely  to  increase.     Why  ? 

10.  Work  out  the  effects,  in  the  way  of  substitution,  of  the  exhaus- 
tion of  our  anthracite  coal  deposits. 

iii.  Derived  Demand 

Very  commonly  the  demand  for  a  commodity  is  a  derived  demand. 
Producers'  goods  afford  examples.  Our  demand  for  them  is  really 
derived  from  our  demand  for  their  products.  Some  persons  call  this 
a  case  of  derived  value.  Demand  and  supply  still  determine  value; 
but  the  demand  in  this  case  is  of  the  kind  indicated. 


EXCHANGE  55 

Questions 

1.  Mention  several  concrete  instances  of  derived  demand. 

2.  Is  demand  a  derived  demand  in  the  cases  of  plows,  threshing 
machines,  wheat,  flour,  bread  ? 

3.  Is  the  demand  for  labor  a  derived  demand?  Would  the  same 
be  true  of  the  demand  for  land  and  for  capital  ? 

4.  Would  you  pay  more  for  a  bushel  of  wheat  than  for  the  flour 
which  can  be  made  from  it  ?     Why  ? 

5.  Could  you  say  that  the  demand  for  property  which  yields  an 
income  is  derived  from  the  demand  for  the  income  ?  Does  this 
suggestion  throw  light  on  the  valuation  of  investments? 

6.  A  certain  bond  pays  5  per  cent  interest  on  its  par  value  of 
$1,000.  If  the  prevaiHng  rate  of  interest  on  similar  security  is  4 
per  cent,  how  much  would  an  investor  pay  for  the  bond,  assuming 
that  it  will  continue  to  pay  interest  indefinitely  ?  If  the  bond  were 
due  to  mature  in  ten  years  would  it  sell  for  less  or  more  ?     Why  ? 

7.  How  could  you  determine  the  price  you  should  ask  for  a  piece 
of  agricultural  land  which  you  own  ? 


iv.  Composite  Demand 

Demand  takes  at  times  the  form  of  composite  demand;  i.e.,  one 
thing  is  wanted  for  many  purposes.  Thus  corn  is  wanted  for  bread, 
for  stock  feeding,  for  starch  manufacture,  for  glucose,  and  for  the 
distiUing  of  alcohol. 

Questions 

1.  Give  six  other  examples  of  composite  demand. 

2.  Could  a  commodity  be  subject  to  an  clastic  demand  for  one 
purjjose  or  want,  and  to  an  inelastic  demand  for  another  purpose — 
all  at  the  same  price  ? 

3.  Is  demand  a  composite  demand  in  the  case  of  (a)  machinery 
in  general  ?  {b)  printing-jjresses  ?  {c)  labor  in  general  ?  {d)  services 
of  coachmen  ?  (e)  land  in  general  ?  (/)  Wall  Street  lots  ?  (g)  materials 
in  general  ?  (//)  bricks  ?  (?)  cotton  ? 

4.  What  significance,  in  this  connection,  attaches  to  the  dis- 
tinction between  (a)  specialized  and  free  capital?  {b)  skilled  and 
unskilled  labor?  (c)  improved  and  unimproved  land? 

v.  Joint  Demand 

Joint  demand  exists  in  case  the  demand  for  one  good  involves 
in  practice  a  demand  for  another  also. 


56  OUTLINES   OF  ECONOMICS 

Questions 

1.  What  commodities  are  demanded  jointly  with  (a)  cement? 
(b)  nails?  (c)  cameras?  (d)  flour? 

2.  Give  six  other  examples  of  joint  demand. 

3.  How  would  cheapening  of  automobiles  affect  the  demand  for 
gasoline  ? 

4.  Is  demand  a  joint  demand  in  the  case  of  (c)  machinery  ?  (b) 
raw  material  ?  (c)  land  ?  (d)  labor  ? 

5.  Are  many  cases  of  joint  demand  also  cases  of  derived  demand  ? 

6.  Should  you  expect  to  pay  as  much  for  a  barrel  of  flour  as  for 
the  bread  which  can  be  made  from  it  ?     Why  ? 

5.  Analysis  or  Supply 

a)  Meaning  of  Supply 

b)  Determinants  of  Supply 

c)  Certain  Special  Forms  or  Manifestations  of  Supply 

The  following  analysis  of  supply  is  supplementary  to  the  brief 
treatment  of  demand  and  supply  in  sec.  2,  above,  and  parallel  to 
the  extended  investigation  of  demand  in  sec.  4. 

a)  Meaning  of  Supply 

Questions 

1 .  Can  one  speak  of  the  amount  supplied  independent  of  price  ? 

2.  Does  the  mere  existence  of  a  commodity  constitute  supply? 

3.  Does  ''supply"  mean  actual  supply,  or  potential  supply,  or 
both? 

4.  Does  the  supply  of  a  commodity  ever  exceed  the  amount 
actually  in  existence  ?  Consider  the  case  of  sales  of  cotton  or  grain 
for  future  delivery.- 

b)  Determinants  of  Supply 

i.  Cost  of  Production,  SimpHfied  Treatment 

ii.  Indeterminate  Cost  of  Production 
iii.  Physical  Limitation  of  Supply 
iv.  Monopolistic  Limitation  of  Supply 

V.  Social  Determinants  of  Supply 

i.  Cost  of  Production,  Simplified  Treatment 

(i)  Uniform  Cost  per  Unit  of  Product:  "Constant  Cost" 
(2)  Different  Costs  for  Different  Units  of  Product 


EXCHANGE  57 

The  term  "cost  of  production"  is  used  by  different  writers  in 
different  senses.  It  may  mean  either  (a)  the  effort  and  sacrifice 
involved  in  production,  or  (b)  the  money  outlay  for  wages,  interest, 
materials,  taxes,  etc. — -i.e.,  the  expenses  of  production,  ordinarily  paid 
by  the  entrepreneur.  Each  usage  has  its  advantages;  but  the  second 
will  ordinarily  be  followed  in  this  book,  on  the  ground  that  expenses 
afford  a  more  tangible  and  more  familiar  measure  of  cost  than  does 
sacrifice. 

Throughout  the  discussion  of  cost  of  production,  competitive 
conditions  are  assumed. 

(i)  Uniform  Cost  per  Unit  of  Product:  ^^ Constant  Cosf^ 

Questions 

1 .  Is  a  manufacturer  likely  as  a  regular  policy  to  sell  his  goods  for 
less  than  cost  ?  Under  competitive  conditions  is  he  likely  regularly 
to  sell  for  more  than  cost,  reckoning  as  part  of  the  cost  a  minimum 
of  return  to  the  manufacturer  himself,  without  which  he  would  not 
remain  in  the  business  ? 

2.  In  the  following  schedules  what  will  the  price  be,  assuming 
cost  of  production  to  be  the  only  determinant  of  supply? 

Units        Cost  per  Unit         Demand  Schedule  A  Demand  Schedule  B 

loo  $1  I oo  at  $4  each  150  at  $3        each 

200  I  200  at    3     "  175  at    2.50    " 

300  I  300  at    2     "  200  at    2 

400  I  400  at    I     "  300  at    1.50 

500  I  500  at  75c. "  500  at    I 

600  I  600  at  50c.  "  700  at  7SC. 

700  I  700  at  40c.  "  1,000  at  60c. 

3.  Assume  cost  of  production  to  be  the  sole  determinant  of  supply. 
Construct  a  supply  curve  to  represent  the  case  of  goods  increasable 
at  constant  cost,  and  show  that  whatever  demand-curve  be  drawn 
to  intersect  it  the  market  price  indicated  l)y  the  intersection  will  be 
the  same. 

4.  "No  matter  what  the  market  fluctuations  may  be,  in  the  long 
run  cost  of  production  will  be  the  significant  thing  to  watch  in  the 
case  of  these  commodities."     Why  or  why  not? 

5.  Do  concerns  ever  sell  below  cost  of  ])roduction  ?  If  so,  why? 
Could  they  continue  to  do  so  ? 

6.  Does  cost  of  production  influence  market  price  ?  Does  it 
influence  normal  price  ? 

7.  What  docs  "cost  of  production"  mean  when  applied  to  the 
case  of  a  commodity  on  which  practically  all  the  work  of  design  and 
execution  has  been  done  by  one  person  ? 


58 


OUTLINES   OF   ECONOMICS 


(2)  Different  Costs  for  Different  Units  of  Product 

(a)  "Increasing  Cost" 

(b)  ''Diminishing  Cost" 

The  production  of  some  commodities  is  subject  to  conditions  of 
increasing  cost — i.e.,  a  larger  supply  is  more  than  proportionally 
costlier  than  a  smaller  supply.  Other  commodities  can  be  produced 
more  cheaply  in  large  quantities  than  in  small.  It  is  to  these  facts 
that  the  terms  "increasing  cost"  and  "diminishing  cost"  apply. 
They  do  not  refer  to  gradual  changes  brought  about  by  progress  in 
industrial  technique,  or  by  slow  exhaustion  of  the  soil. 

Questions 

I .  Assume  cost  of  production  to  be  the  sole  determinant  of  supply. 
What  will  the  price  be  in  the  following  case  ? 


StTPPLY  Schedule 

Demand 

Schedule 

Additional 

Number 

Total  Cost 

Cost  due  to 

Price  per 

Number 

Supplied 

Additional 

Unit 

Demanded 

Unit 

7 

$231 

$36 

$36 

15 

8 

268 

37 

37 

14 

9 

306 

38 

38 

13 

10 

345 

39 

39 

12 

II 

385 

40 

40 

II 

12 

426 

41 

41 

10 

2.  Assume  cost  of  production  to  be  the  sole  determinant  of  supply. 
Draw  a  curve  of  increasing  cost.  Draw  a  demand  curve  on  the  same 
diagram.     Double  your  demand.     What  effect  upon  price  ? 

3.  "No  matter  what  the  market  fluctuations  may  be,  in  the  long 
run  cost  of  production  under  the  worst  circumstances,  or  marginal 
cost,  will  be  the  significant  thing  to  watch  in  the  case  of  these  com- 
modities."    Why  or  why  not  ? 

4.  Assume  cost  of  production  to  be  the  sole  determinant  of 
supply.  "The  marginal-cost  theory  is  absurd.  Suppose  wheat  is 
seUing  for  70  cents  a  bushel.  A  farmer  who  produces  at  an  average 
cost  of  50  cents  will  net  20  cents  per  bushel  and  will  therefore  be 
under  strong  incentive  to  increase  his  crop,  even  though  its  marginal 
cost  is  70  cents.  Thus,  average  cost  and  not  marginal  cost  is  the 
significant  thing."     Why  or  why  not  ? 

5.  Is  "increasing  cost"  the  same  phenomenon  as  diminishing 
returns  ? 


EXCHANGE  59 

6.  "In  the  case  of  goods  produced  under  conditions  of  diminishing 
cost,  value  will  tend  toward  the  lowest  cost,  in  so  far  as  this  lowest 
cost  can  be  reahzed  in  the  making  of  all  of  the  product  demanded. 
In  so  far,  however,  as  it  is  necessary  at  any  time  to  depend  for  part 
of  the  supply  on  production  at  a  higher  cost,  the  case  resembles  the 
case  of  increasing  cost,  and  values  tend  to  adjust  themselves  to  the 
marginal  cost,  or  cost  of  production  under  the  worst  circumstances." 
Assuming  cost  of  production  to  be  the  sole  determinant  of  supply, 
is  this  statement  correct  ?     Explain. 

7.  Draw  a  curve  representing  diminishing  cost.  Regarding  this 
as  a  supply  curve,  draw  a  demand  curve  intersecting  it.  Draw 
another  curve  representing  doubled  demand.  How  does  doubling  the 
demand  affect  the  price  ? 

8.  Draw  a  figure  to  show  that  when  supply  is  governed  by  con- 
ditions of  diminishing  cost  the  supply  and  demand  curves  may 
intersect  in  two  or  more  points.  Which  intersection  will  represent 
normal  value  ?     Show  how  elasticity  of  demand  affects  this  problem. 

9.  The  decrease  of  costs  in  manufacture  as  a  result  of  the  superior 
efficiency  of  large-scale  production  has  often  been  called  "increasing 
returns."  Is  this  a  correct  use  of  the  term  ?  Give  a  clear  instance  of 
increasing  returns  in  manufacture. 

ii.  Indeterminate  Cost  of  Production 

(i)  Direct  Cost  and  Indirect  Cost 

(2)  Joint  Cost 

(3)  Effects  of  Progress  in  Methods  of  Production 

(4)  Appreciation  and  Depreciation 

Under  the  complex  conditions  of  modern  industry  the  determi- 
nation of  costs  is  an  extremely  obscure  and  difficult  problem.  The 
following  questions  suggest  some  of  the  difficulties  involved. 

(i)  Direct  Cost  and  Indirect  Cost 

Questions 

1.  Explain  what  is  meant  by  direct  cost  and  indirect  cost,  using 
illustrations  taken  from  the  railway  industry. 

2.  Explain  the  terms  prime  cost,  supplementary  cost,  fixed 
charges,  overhead  charges. 

3.  Would  it  be  good  ])olicy  to  continue  operating  a  cotton-mill 
if  the  earnings  were  insufficient  to  pay  (a)  dividends?  {b)  regular 
interest  on  borrowed  cai)ital?  (c)  cost  of  materials?  {d)  wages? 

4.  If  employers  paid  wages  at  a  fixed  rate  per  hour,  regardless  of 
the  time  worked,  would  it  be  just  as  profitable  to  run  a  factory  6 
hours  a  day  as  to  run  it  10  hours?     Why? 


6o  OUTLINES   OF  ECONOMICS 

5.  Why  are  night  shifts  of  workmen  employed  in  many  factories? 

6.  A  newspaper  with  a  circulation  of  90,000  is  printed  on  a  press 
designed  to  handle  an  edition  of  100,000  copies.  How  would  the 
cost  per  copy  be  affected  by  increasing  the  edition  to  (a)  95,000? 
(b)  150,000? 

7.  Try  to  point  out  important  economic  problems  of  the  day  that 
are  in  large  measure  due  to  the  way  in  which  heavy  fixed  charges 
affect  the  character  of  competitive  industry. 

(2)  Joint  Cost 

Questions 

1.  A  family  employs  a  coachman  who  works  at  odd  moments  in 
the  vegetable  garden.  Assuming  that  the  coachman  would  be 
employed  in  any  event,  how  should  you  estimate  the  cost  of  raising 
the  vegetables  ? 

2.  Suppose  you  were  a  farmer,  engaged  in  ordinary  general 
farming.  Could  you  tell  how  much  it  cost  (a)  to  fatten  a  hog  for 
market  ?  (b)  to  raise  a  heifer  ?  (c)  to  cultivate  pumpkins  between  the 
rows  of  corn  ? 

3.  Is  there  a  fairly  well  established  market  price  for  hogs,  or 
heifers,  or  pumpkins  ?  Is  there  a  normal  price  ?  If  so,  how  can  it 
have  been  lixed  ? 

4.  Can  you  determine  the  actual  cost  of  butter  or  wool  ? 

(3)  Effects  of  Progress  in  Methods  of  Production 

Questions 

1.  "Every  time  a  new  tyj^e  of  machine  is  installed  in  a  factory 
the  cost  of  producing  the  product  manufactured  there  is  in  some 
degree  reduced."     Comment  on  this  assertion. 

2.  Should  you  accept  as  true  the  statement  that  on  the  whole 
the  cost  of_  production  of  manufactured  articles  is  gradually  but 
steadily  faUing  ?     If  so,  can  you  explain  why  ? 

3.  It  is  sometimes  said  that  not  cost  of  production,  but  what  it 
would  cost  to  reproduce  a  commodity,  is  the  real  cost-factor  in  sup- 
ply. What  is  the  meaning  of  this  distinction?  Is  the  point  well 
taken  ? 

4.  In  a  factory  the  old  machinery,  as  it  wears  out,  is  gradually 
replaced  by  machinery  of  the  latest  improved  pattern.  Consequently, 
some  of  the  machinery  at  any  one  time  in  use  is  superior  to  the  rest 
of  the  equipment.  Under  such  conditions,  how  is  cost  of  production 
reckoned  ? 


EXCHANGE  6 1 

5.  At  a  given  time  the  supply  of  cotton  cloth  is  derived  from  (a) 
new  and  up-to-date  southern  plants;  (b)  obsolete  New  England 
plants;  (c)  progressive  New  England  plants,  with  some  old  machinery 
and  some  new  machinery.  Which  cost  of  production  will  be  sig- 
nificant in  determining  the  price  of  the  cloth  ? 

6.  Should  you  expect  the  price  of  an  article  to  correspond  to  the 
cost  of  production  of  that  element  of  supply  which  has  cost  most  to 
produce,  or  to  the  cost  of  production  of  some  less  costly  element, 

a)  when  reduced  cost  results  purely  from  enlarging  the  output 
of  established  plants  without  changes  of  method  or  equip- 
ment? 

b)  when  reduced  cost  results  from  construction  and  utilization 
of  larger  plants  ? 

c)  when  reduced  cost  is  the  consequence  of  successive  improve- 
ments of  machinery  and  methods,  available  in  small  plants 
as  well  as  large  ? 

(4)  Appreciation  and  Depreciation 

Questions 

1.  A  fruit  grower,  after  laborious  precautions  against  insects, 
black-knot,  etc.,  markets  a  scanty  crop  of  plums  from  young  trees 
which  have  not  begun  to  bear  their  full  yield.  How  can  he  separate 
the  cost  of  this  crop  from  the  cost  of  subsequent  crops? 

2.  A  landowner  clears  a  tract  of  land  which  he  then  sells  at  an 
advanced  price.  He  also  sells  firewood  from  the  trees  removed  in 
the  process  of  clearing.  How  much  of  the  cost  of  clearing  is  to  be 
reckoned  as  the  cost  of  production  of  the  firewood? 

3.  What  factors  must  be  considered  in  determining  the  cost  of 
production  of  (a)  timber  ?  (b)  iron  ore  ?  (c)  petroleum  ? 

4.  Assuming  that  a  manufacturer  who  invests  in  machinery  ]:)lans 
to  get  back,  out  of  the  earnings  of  the  machine  during  its  time  of 
service,  the  original  outlay,  with  interest,  how  is  he  to  know  what 
proportion  of  this  is  to  be  charged  as  cost  of  production  against  each 
unit  of  product  ? 

5.  Discuss  the  bearing  of  each  of  the  following  influences  on  the 
depreciation-factor  in  cost  of  production:  (a)  change  of  fashion;  (h) 
invention  of  new  processes;    (c)  durability  of  machinery. 

iii.  Physical  Limitation  of  Supply 

Under  this  head  will  be  considered  not  ohly  goods  of  which  the 
quantity  cannot  under  any  circumstances  be  increased,  but  also 
goods  of  which  the  quantity  in  existence  is  locally  or  temporarily 
limited. 


62  OUTLINES   OF  ECONOMICS 

Questions 

1.  Suppose  that  as  regards  a  certain  kind  of  rare  coin,  A  would 
buy  one  at  $ioo;  B,  one  at  $90;  C  and  D,  one  each  at  $80;  E,  F, 
and  G,  one  each  at  $60.  If,  now,  seven  are  to  be  disposed  of  in  a 
competitive  market,  what  will  the  price  be  ?  Does  cost  of  production 
affect  the  situation  ? 

2.  In  the  case  of  old  spinning  wheels  what  would  normal  price 
mean?  Would  cost  of  production  have  a  definite  relation  to  price 
in  such  a  case  ? 

3.  What  determines  the  price  of  a  unique  original  work  of  ancient 
art,  or  of  a  first-folio  Shakespeare  ?  Should  you  agree  to  the  proposi- 
tion that  in  such  cases  supply  is  insignificant  and  price  depends  on 
demand  alone  ? 

4.  If  it  takes  a  year  to  build  a  steel  mill,  will  this  have  a  bearing 
upon  the  value  of  steel  mills  in  case  of  a  sudden  increase  in  the  demand 
for  steel  ?     Why  ? 

5.  How  is  it  possible  to  corner  the  market  in  wheat?  Cannot 
the  supply  of  wheat  be  increased  ? 

iv.  Monopolistic  Limitation  of  Supply 

Questions 

1.  Can  a  monopolist  control  the  demand  for  his  monopolized 
commodity?  Can  he  control  supply?  Can  he  control  price? 
Explain. 

2.  Suppose  a  monopolist  could  know  in  advance  the  demand 
schedule  and  the  cost  schedule  of  his  commodity.  Where  would  he 
fix  the  price  in  the  following  case  ? 

Profit—? 


)ema 

nd  Schedule 

10 

at  $] 

,000 

20 

800 

30 

700 

40 

600 

60 

500 

80 

450 

100 

400 

Cost  Schedule 

10  at 

$500 

20 

460 

30 

450 

40 

430 

60 

425 

80 

420 

100 

415 

3.  From  the  evidence  of  this  illustration  work  out  a  general  prin- 
ciple to  explain  monopoly  price. 

4.  Formulate  a  general  statement  of  the  relation  of  monopoly 
price  to  elasticity  or  inelasticity  of  demand. 

5.  How  would  the  general  principle  of  monopoly  price  (Question 
3)  be  modified  in  the  case  of  a  commodity  for  which  there  is  an  avail- 
able substitute  not  controlled  by  monopoly  ? 


EXCHANGE  63 

6.  How  great  is  the  power  of  a  monopolist  who  deals  in  the  neces- 
sities of  life  ?   in  the  luxuries  of  life  ? 

7.  How  great  is  the  power  of  a  monopolist  who  has  control  of 
natural  resources  ? 

8.  "In  the  case  of  a  monopolized  good  cost  of  production  does  not 
affect  price."     Comment. 

9.  A  piano  manufacturer  buys  out  all  his  competitors.  Can  he 
now  sell  the  former  aggregate  output  at  an  advanced  price  ?     Why  ? 

10.  How  effectual  in  restraining  monopoly  do  you  think  potential 
competition  is  ? 

11.  Professor  Taylor  says:  "The  normal  price  of  goods  produced 
by  a  capitalistic  monopoly  tends  to  approximate  the  cost  of  produc- 
tion to  outsiders,  usually  remaining,  however,  somewhat  above  such 
cost."     Comment. 

12.  Suppose  that  of  the  price  charged  by  a  monopolist  for  his 
product  5  per  cent  is  profit.  He  now  raises  the  price  5  per  cent. 
By  what  percentage  wnll  this  increase  his  profit,  assuming  sales  to 
remain  the  same  ?     How  much  are  sales  likely  to  fall  off  in  practice  ? 


V.  Social  Determinants  of  Supply 

(i)  Formal  Social  Control 
(2)  Informal  Social  Control 

Questions 

1.  Illustrate  by  examples  various  forms  of  legislation  which 
increase  or  diminish  the  supply  of  commodities. 

2.  Mention  commodities  the  sale  of  which  is  supervised  by  (a) 
the  police;  (b)  the  pubHc  health  authorities;  (c)  the  postal  au- 
thorities. 

3.  Does  the  pure  food  law  tend  to  affect  the  supply  of  certain 
foods  ?     Why  or  why  not  ? 

4.  Exj3lain  prices  of  theater  tickets,  football  tickets,  physicians' 
fees. 

5.  Do  men  ever  abstain  from  suj^plying  a  certain  good  because 
to  do  so  would  cause  them  to  lose  the  esteem  of  their  fellows  ? 

6.  Does  a  prohibition  law  which  is  to  some  extent  evaded  affect 
the  price  at  which  liquor  is  sold  in  the  prohibition  territory  ? 

7.  Can  you  cite  cases  where  (a)  custom,  (b)  habit,  (c)  ignorance 
affects  the  supply  of  goods  ? 

8.  Which  of  the  above  ciuestions  deal  wilh  formal  social  control? 
Which  with  informal  control  ? 


64  OUTLINES   OF   ECONOMICS 

c)  Certain  Special  Forms  or  Manifestations  of  Supply 

i.  Perishable  Goods 
ii.  Joint  Supply  and  By-Products 
iii.  Composite  Supply 

i.  Perishable  Goods 

Questions 

1.  Under  competitive  conditions  the  sellers  of  goods  will  ordinarily 
choose  a  favorable  time  to  sell,  and  will  hold  back  their  goods  jf 
the  market  is  temporarily  depressed.  Is  the  same  course  open  to 
sellers  of  strawberries?  Why?  What  is  the  effect  on  the  price  of 
strawberries  ? 

2.  Mention  several  commodities  the  perishable  nature  of  which 
notably  affects  the  supply. 

3.  Does  perishability  account  for  the  low  prices  which  prevail  at 
(a)  Saturday  night  sales  of  fish,  vegetables,  flowers  ?  (b)  "mid-season" 
sales  of  wearing  apparel  ?  (c)  bargain  sales  of  calendars  in  February  ? 
((/) ''fire  sales"? 

4.  Has  cold-storage  altered  conditions  of  supply  of  perishable 
goods?     Has  it  made  them  cheaper  or  dearer? 

5.  Has  cost  of  production  any  part  whatever  in  determining  the 
price  of  strawberries  ? 

6.  Would  the  principle  that  competitive  prices  conform  closely 
to  cost  of  production  apply  to  perishable  goods? 

7.  Should  you  count  dealers'  losses  by  the  spoiling  of  goods  as  a 
part  of  normal  cost  of  production  ? 

8.  It  has  been  said  that  the  services  of  labor  are  a  perishable 
commodity.     What  is  meant  by  this  statement  ? 

ii.  Joint  Supply  and  By-Products 

Problems  invohdng  more  or  less  of  the  principle  of  joint  supply 
have  already  been  introduced  in  treating  of  railway  rates  and  in 
discussing  Indeterminate  Cost  of  Production.  Under  the  latter 
head  in  particular  are  problems  which  closely  parallel  the  problems 
of  this  section.  The  emphasis,  however,  was  there  laid  upon  cost. 
Here  the  topic  of  cost  is  only  incidentally  introduced,  and  attention 
is  directed  to  the  fact  that  supplying  the  market  with  one  commodity 
often  involves  in  practice  the  supplying  of  other,  related  goods. 

Questions 

1.  Why  is  it  possible  to  buy  a  beef-tongue  without  having  to  pay 
for  a  whole  ox  ? 

2.  Mention  as  many  as  possible  of  the  salable  products  which 


EXCHANGE  65 

result  from  the  killing  of  an  ox  by  (a)  a  country  butcher;   (b)  one  of 
the  great  packing-houses. 

3.  What  other  articles  are  supplied  jointly  with  mutton,  flour, 
cotton,  kerosene,  lumber,  butter  ? 

4.  If  the  price  of  hides  falls,  does  it  follow  that  men  will  restrict 
the  production  of  them  ? 

5.  Would  a  sudden  and  large  increase  in  the  demand  for  beef 
affect  the  supply  of  hides  ?  of  shoes  ?  of  harness  ? 

6.  Give  examples  of  important  commodities  which,  as  by-products, 
are  sold  in  much  larger  quantities  and  at  a  much  lower  price  than 
would  be  possible  if  they  were  made  and  sold  as  separate,  inde- 
pendent products. 

7.  Is  there  a  normal  price  for  a  by-product  ? 

8.  Does  the  principle  of  joint  supply  govern  the  case  of  goods 
produced  by  the  general  farmer  ? 

9.  Do  you  think  the  principle  is  one  of  wide  application  ?  Does 
it  render  easier  or  more  complicated  the  study  of  value  ? 

iii.  Composite  Supply 

Questions 

1.  Mention  different  sources  of  the  supply  of  (a)  soap;  (b)  glue; 
(c)  paper. 

2.  Give  other  examples  of  commodities  of  which  the  supply  is 
derived  from  different  materials  or  by  different  processes. 

3.  Do  anthracite  coal,  bituminous  coal,  and  coke  afford  an  example 
of  composite  supply?  If  coke  were  produced  more  cheaply  and  in 
larger  quantities  would  the  supply  of  bituminous  coal  be  affected  ? 
How  ? 

4.  Distinguish  between  copiposite  supply  and  alternative  demand. 

5.  What  is  the  relation  between  composite  supply  and  the  principle 
of  substitution  ? 

6.  The  Marginal  Utility  Explanation  of  Value 

In  recent  years  the  doctrine  of  marginal  utility  has  been  much 
used  as  an  explanation  of  value.  It  has  been  severely  criticized, 
but  an  exposition  of  the  doctrine  is  justified  by  (a)  the  point  of  view 
it  contributes;  (b)  the  fact  that  the  student  in  his  reading  is  certain 
to  meet  with  the  terminology  of  this  doctrine. 

Marginal  (or  final)  utility  is  the  utility  of  the  last  or  least  impor- 
tant increment  of  supply.  The  term  final  utiUty  is  suggested  by  the 
diminishing  utility  of  successive  units  of  a  good. 

The  principle  formulated  by  the  "marginal  utility  theorists" 
may  be  put  as  follows: 


66  OUTLINES   OF   ECONOMICS 

The  market  price  of  a  commodity  is  determined  by  the  valuation 
of  the  marginal  purchasers,  i.e.,  those  who  would  refuse  to  purchase 
if  any  increase  in  price  took  place.  To  these  purchasers  the  marginal 
utility  of  the  commodity  is  just  equal  to  that  of  the  money  required 
to  purchase  it.  Thus  it  is  frequently  said  that  market  price  is  deter- 
mined by  marginal  utility. 

If  the  conditions  of  supply  were  to  change,  another  set  of  pur- 
chasers would  be  placed  in  the  marginal  position,  and  would  determine 
price  by  their  valuations. 

It  is  obvious  that  the  above  statement  of  the  marginal  utility 
explanation  of  value  is  in  complete  accord  with  the  demand  and 
supply  theory.  That  theory  does  not  deny  that  those  purchasers 
who  are  ready  to  drop  out  when  prices  rise  are  in  a  position  to  exert 
a  direct  influence  upon  price.  The  demand  and  supply  theory  lays 
emphasis  upon  the  entire  volume  of  demand;  it  takes  for  granted 
variability  of  part  of  the  demand.  The  marginal  utility  theory  lays 
emphasis  upon  the  variable  part  of  the  demand;  the  existence  of  a 
large  unvarying  demand  is  taken  for  granted. 

Questions 

1.  Is  marginal  utiUty  the  utility  of  the  last  unit  supplied  ?  If  all 
the  units  of  a  good  were  simultaneously  supplied  how  should  you 
define  marginal  utility  ? 

2.  According  to  the  marginal  utility  theory  of  value  how  can  you 
explain  (a)  the  high  price  of  diamonds  ?  (b)  the  low  price  of  drinking 
water  ? 

3.  Does  the  marginal  utihty  theory  make  allowance  for  (c)  cost 
of  production  ?  (b)  normal  value  ? 

4.  ''The  marginal  utility  theorists  ignore  supply  and  attempt  to 
explain  value  in  terms  of  demand  alone."  Comment.  Is  marginal 
utility  independent  of  supply  ? 

5.  Define:  marginal  buyer,  marginal  seller,  marginal  producer, 
marginal  cost. 

6.  When  two  men  bargain  to  fix  the  price  of  an  article  do  you 
imagine  they  are  conscious  of  estimating  marginal  utility  ? 

7.  If  you  were  deciding  whether  to  spend  three  dollars  for  a 
dinner  or  to  use  the  same  money  for  a  cheaper  dinner  and  some  new 
neckties,  would  your  choice  be  determined  by  considerations  of 
marginal  utility  ? 

7.  General  Questions  on  Value 

1.  What  is  the  value  of  an  undetected  counterfeit  $10  bill  ? 

2.  Can  you  think  of  anything  which  has  value  and  yet  is  not 
scarce  ?  Can  you  think  of  anything  which  is  scarce  and  yet  has  no 
value  ? 


EXCHANGE  67 

3.  What  is  the  relation  of  utility  to  value? 

4.  Explain  the  prices  fixed  at  an  auction  sale  (a)  in  terms  of 
demand  and  supply;    (b)  in  terms  of  marginal  utility. 

5.  "Value  is  determined  by  demand  and  supply";  "value  is 
determined  by  cost  of  production";  "value  is  determined  by  mar- 
ginal cost";  "value  is  determined  by  cost  of  reproduction";  "value 
is  determined  by  marginal  utility."  Can  these  propositions  be 
reconciled  ? 

6.  Does  increase  of  demand  lead  to  increase  of  supply?  How? 
Does  increase  of  supply  lead  to  increase  of  demand  ? 

7.  Can  we  have  an  elastic  supply  ?  an  inelastic  supply  ?  If  so, 
what  are  the  determining  factors  ? 

8.  Tell  whether  the  demand  for  the  following  is  a  derived,  joint, 
composite,  elastic,  or  inelastic  demand:  capital;  labor;  land;  shoes; 
wheat;  flour;  bread;  leather;  hides;  steak;  butter;  books;  pencils; 
wine;  playing  cards;  houses. 

9.  Tell  of  the  above  whether  the  supply  is  joint,  composite,  elastic, 
or  inelastic. 

10.  Does  a  person  ever  pay  a  high  price  for  a  thing  because  he 
fears  that  if  he  waits  for  lower  prices  the  supply  will  all  be  sold? 
Does  this  disprove  the  assumptions  of  the  demand  schedule? 

11.  What  is  meant  by  the  statement  that  "demand  exceeds  sup- 
ply "  ?  Under  such  circumstances  can  a  price  be  fixed  ?  Can  exchange 
take  place  ? 

12.  What  do  we  mean  by  saying  that  a  good  is  not  produced 
because  the  cost  of  production  is  too  high  ? 

13.  What  is  the  relation  of  cost  of  production  to  value  ? 

14.  "Hot-house  grapes  sell  for  $1  a  pound.  By  constructing 
large  hot-houses  and  utilizing  the  advantages  of  large-scale  produc- 
tion ten  million  pounds  could  annually  be  produced  at  a  cost  of  60 
cents  a  pound,  thus  returning  $4,000,000  above  all  expenses. "  Is 
anything  wrong  with  this  argument  ? 

15.  Even  when  Raphael  was  alive  did  the  value  of  his  pictures 
depend  upon  the  cost  of  production  ?  Did  he  possess  any  natural 
monopoly  ? 

16.  Can  price  long  remain  above  the  cost  of  production  in  an 
average  factory  ?  Can  it  remain  above  the  cost  to  the  largest  manu- 
facturers ? 

17.  The  cost  of  raising  wheat  on  the  best  new  lands  of  Canada 
is  said  to  be  far  below  the  average  cost  of  wheat  in  the  United  States. 
Under  these  circumstances  can  the  United  States  continue  to  sell 
wheat  in  the  competitive  markets  of  the  world  ? 

18.  Does  not  value  depend  upon  the  amount  of  labor  expended  ? 
Is  all  labor  alike?  If  it  were,  would  a  great  expenditure  of  labor 
cause  a  machine  for  blowing  soap  bubbles  to  have  a  liigh  \'alue  ? 


68  OUTLINES   OF   ECONOMICS 

19.  If  all  wages  were  doubled,  what  would  be  the  effect  upon 
values  ? 

20.  Suppose  commodities  x  and  y  are  made  out  of  the  same  raw 
material  and  cost  equal  amounts  of  the  same  kind  of  labor.  Will 
they  have  the  same  prices  ? 

21.  How  is  the  general  statement  that  (normal)  value  approxi- 
mates cost  of  production  affected  by  (a)  much  fixed  capital  in  the 
industry  ?  (b)  speculative  character  of  the  industry  ?  (c)  the  growth 
of  combination  or  monopoly  ? 

22.  Does  cost  of  production  determine  the  price  of  land  in  Okla- 
homa when  first  opened  for  settlement  ?     What  does  determine  it  ? 

23.  .T  and  y  are  used  in  making  z.  How  would  a  reduction  in  the 
value  of  X  affect  the  value  of  y  and  2  ?  How  would  the  discovery  of  a 
cheap  substitute  for  s  affect  the  value  of  x  and  y  ? 

24.  If  there  were  a  combination  among  all  the  buyers  of  a  certain 
raw  product  what  would  determine  the  price  of  that  product  ? 

25.  A  trust  will  sometimes  sell  its  goods  below  cost  in  a  certain 
locaHty  where  there  is  competition  and  make  up  the  loss  by  the  high 
price  obtained  elsewhere.  What  law  should  you  say  determined 
such  prices  ? 

26.  A  certain  machine  cost  $2,000.  It  could  now  be  duplicated 
for  $1,500;  but  a  newly  invented  and  patented  machine,  which  turns 
out  50  per  cent  more  product  in  the  same  time  with  the  same  expense 
for  power,  attendance,  etc.,  can  be  made  for  $1,000.  Assuming  that 
the  original  machine  is  as  good  as  new,  explain  carefully  what  its 
value  is  likely  to  be. 

27.  A  publisher  has  printed  5,000  copies  of  a  novel  which  proves 
a  failure.  What  will  determine  the  value  of  a  copy  (a)  assuming 
that  the  whole  edition  has  been  bought  by  booksellers  ?  (b)  assum- 
ing that  most  of  the  books  are  still  on  the  publisher's  hands  ? 

28.  Look  at  the  commodities  advertised  for  sale  in  the  daily  news- 
pajier.  Do  the  economic  principles  of  value  which  have  been  out- 
lined in  the  preceding  pages  really  explain  the  way  in  which  their 
prices  are  fixed  ?     If  not,  why  not  ? 

29.  Do  these  principles  of  value  correctly  explain  the  price  of  a 
newspaper,  a  second-hand  typewriter,  a  glass  of  soda  water,  a  street- 
car fare,  a  new  novel,  a  ticket  to  the  circus,  a  suit  of  clothes,  a  rail- 
road excursion  ticket,  hats  at  a  fire  sale,  a  ticket  to  an  all-star  opera 
performance,  shoes  at  a  bargain  sale,  a  race  horse  ?     If  not,  why  not  ? 

30.  What  is  the  relation  of  custom  and  habit  to  value  ? 

31.  Look  at  the  daily  report  on  the  wheat  market  in  the  newspaper. 
Can  you  see  the  law  of  demand  and  supply  working  there  ? 

32.  Do  the  government  reports  regarding  the  prospects  for  crops 
of  wheat,   cotton,   etc.,   have   any  influence   upon   market  prices? 


EXCHANGE  69 

How?  Why  do  merchants  watch  these  reports  more  closely  than 
reports  or  estimates  of  gold  production  ? 

;^2.  Do  the  storekeepers  fix  the  price  of  the  grain  they  buy  of 
the  farmer  ? 

34.  Can  it  be  said  that  the  law  of  demand  and  supply  fixes  the 
price  of  wheat  when  there  is  a  corner  in  the  market  ?  Does  cost  of 
production  have  anything  to  do  with  the  price  at  that  time  ? 


III.  The  Mechanism  of  Exchange 

1.  Money  Exchange 

2.  Credit  Exchange 

Thus  far  we  have  dealt  with  markets  and  the  establishment  of 
values  and  prices  in  the  market.  In  doing  so,  we  have  constantly 
been  assuming  certain  media  or  means  of  exchange.  Since  money 
and  credit  devices  are  so  familiar  it  was  safe  thus  to  assume  them. 
Our  general  knowledge  enabled  us  to  use  them  in  our  reasoning. 

We  must  now  consider  in  more  detail  this  mechanism  which  we 
were  assuming. 

I,  Money  Exchange 

a)  The  Nature  and  Functions  of  Money 

b)  The  Characteristics  of  a  Satisfactory  Money  Good 

c)  The  Forms  of  Money 

d)  The  Value  of  Money 

e)  Gresham's  Law 

f)  The  Kinds  of  Standard 

Money  serves  as  an  aid  in  exchanging  goods  and  pro\ndes  a  con- 
venient means  of  expressing  their  relative  values  in  terms  of  prices. 
Credit  may  and  commonly  does  perform  money- work,  and  credit, 
as  well  as  money,  enters  into  price  relations.  The  concrete  applica- 
tions of  credit  are  best  studied  under  banking. 

a)  The  Nature  and  Functions  of  Money 

Questions 

1.  Could  we  have  any  exchange  by  using  barter  alone? 

2.  What  is  meant  by  the  "double  coincidence"  of  barter? 

3.  Could  the  exchange  system  be  as  complex  as  it  is  today  if  we 
depended  upon  barter  alone?  Would  the  productive  process  be  as 
efficient  ? 


70  OUTLINES   OF   ECONOMICS 

4.  Can  you  cite  any  cases  of  barter  being  used  today  ? 

5.  What  difficulties  of  a  system  of  barter  are  overcome  by  the 
use  of  money  ? 

6.  What  is  money?  Must  money  have  value?  Has  gold  coin 
value  because  it  is  money  or  is  it  money  because  it  has  value  ? 

7.  It  has  been  said  that  the  functions  of  money  are  to  serve  as  (a) 
a  medium  of  exchange;  (b)  a  standard  (common  denominator)  of 
value;  (c)  a  standard  for  deferred  payments.  Explain  why  each 
of  these  functions  is  useful  and  cite  cases  where  money  performs  each 
of  these  functions. 

8.  A  buys  1,000  bushels  of  wheat  from  B  at  $1  a  bushel.  B 
accepts  in  payment  a  note  for  $1,000  payable  with  interest  two  years 
from  date.  Two  years  later  A  pays  B  the  $1,000  with  interest  agreed. 
Which  of  the  three  money-functions  does  money  perform  in  the 
course  of  these  transactions  ? 

9.  If  half  the  money  in  a  country  were  suddenly  to  disappear, 
would  the  wealth  of  the  country  be  diminished  ? 

10.  Would  it  be  possible  to  have  a  standard  of  value  which  did 
not  serve  as  a  mecUum  of  exchange  ?  a  medium  of  exchange  which  did 
not  serve  as  a  standard  of  value?  Can  you  find  examples  in  the 
currency  of  this  country  ? 


h)  The  Characteristics  of  a  Satisfactory  Money  Good 

Questions 

1.  Name  five  commodities  formerly  used  as  money  and  explain 
why  they  were  abandoned  for  that  purpose. 

2.  Would  the  following  make  good  money:  iron,  wheat,  diamonds, 
glass  beads,  sea  shells,  beaver  skins  ?  If  not,  why  not  ?  Which  of 
the  three  chief  functions  of  money  would  each  be  inadequate  to  per- 
form ? 

3.  Are  there  any  respects  in  which  gold  is  superior  as  money  to  the 
above-mentioned  commodities?  If  so,  explain  the  superiority  in 
each  case. 

4.  Reasoning  from  your  answers  to  the  above  questions,  what 
should  you  conclude  are  the  characteristics  of  a  good  money  ?  Take 
up  in  turn  the  functions  of  money  and  state  which  of  the  character- 
istics of  a  satisfactory  money-good  apply  to  each  function. 

5.  Are  there  any  respects  in  which  gold  or  silver  fall  short  of 
these  desired  characteristics? 

6.  Is  a  low  price  level  unfortunate  provided  it  is  stable  ?  Is  a 
high  price  level  absolutely  high  or  high  by  comparison  ?  If  a  high 
price  level  is  wise,  how  high  should  it  be  ?     Why  stop  there  ? 


EXCHANGE  71 

7.  If  a  change  in  the  value  of  money  affects  all  prices  alike,  is 
anybody  injured  thereby  ? 

8.  What  classes  are  adversely  affected  by  a  rise  in  the  value  of  the 
standard  ?   a  fall  in  the  value  ? 

9.  It  has  been  argued  that  a  steadily  depreciating  standard  tends 
to  stimulate  business.  Why  ?  Do  you  think  such  a  standard  would 
be  desirable? 

10.  It  was  said  that  the  uncertainty  about  the  standard  in  this 
country  about  1893  helped  to  cause  the  panic.  Is  this  a  probable 
statement  ? 

11.  "It  is  crop-moving  time.  Since  farmers  do  not  use  checks 
very  much  we  should  have  more  money  for  a  while."  What  does 
this  mean  ?     Why  more  money  "for  a  while"  ? 

c)  The  Forms  of  Money 

i.  Standard  Money 
ii.  Token  and  Subsidiary  Currency 
iii.  Credit  Money 

Questions 

1.  What  is  standard  money  in  the  United  States?  What  is  the 
mojietary  unit  ?  Is  the  unit  actually  current  as  coin,  or  is  it  a  mere 
definition? 

2.  Why  does  not  the  government  use  pure  gold  and  silver  in  its 
gold  and  silver  coins  ? 

3.  What  is  seigniorage ?   brassage? 

4.  In  the  days  of  the  California  gold  discoveries  different  indi- 
viduals and  firms  coined  their  own  gold  pieces.  Is  there  any  reason 
for  prohibiting  such  a  practice  and  reser\ing  the  right  of  coinage  to  the 
government  ? 

5.  Why  stamp  a  device  on  coins?     Why  mill  the  edges  of  coins? 

6.  Would  it  sometimes  be  more  convenient  to  have  an  order  for 
a  bushel  of  wheat  than  to  have  the  wheat  itself  ?  Answer  the  same 
(juestion  for  a  bag  of  10,000  gold  coins. 

7.  "Token  money  is  necessary  in  order  to  have  money  in  denomi- 
nations convenient  for  exchange  transactions  of  all  possible  sizes." 
Why  or  why  not  ? 

8.  Why  are  copper  and  nickel  used  for  coins  ? 

9.  Some  people  are  urging  the  coining  of  the  one-half  cent  piece. 
Why? 

10.  Why  do  we  have  $1,000  bills  in  our  currency  system  ? 

1 1 .  What  are  subsidiary  coins  ?  Are  they  legal  tender  ?  Define 
legal  tender, 


72  OUTLINES   OF  ECONOMICS 

12.  Cite  instances  of  token,  subsidiary,  and  credit  money  in  the 
currency  system  of  the  United  States  today. 

13.  What  is  meant  by  likening  credit  money  to  a  "road  through 
air"  that  permits  society  to  use  for  other  purposes  the  ground  formerly 
us  id  for  the  road  ?     Are  roads  through  air  safe  ? 

14.  The  United  States  government  keeps  a  gold  reserve  of  150 
millions  against  346  millions  of  greenbacks.  How  does  it  dare  to 
keep  less  than  100  per  cent  reserve  ? 

15.  A  bank  often  has  outstanding  current  obligations  to  the  extent 
of  four  or  more  times  its  cash  on  hand.     How  does  it  dare  to  do  this  ? 

16.  Copy  from  each  of  the  kinds  of  paper  money  in  use  in  the 
United  States  today  the  significant  statements  printed  thereon. 

d)  The  Value  of  Money 

i.  The  Value  of  Standard  Money 
ii.  The  Value  of  Other  Forms  of  Money 


i.  The  Value  of  Standard  Money 

The  value  of  standard  money,  so  long  as  there  is  free  and  unlimited 
coinage,  depends  upon  the  value  of  the  money-metal  used  in  the  coin. 
The  value  of  the  money-metal,  like  the  value  of  other  commodities, 
is  determined  by  demand  and  supply. 

Careful  attention  should  be  paid  to  the  factors  which  affect  the 
demand  for  the  money-metal.  The  demand  arises  from  two  sources: 
(a)  the  demand  for  use  in  the  arts,  and  (b)  the  demand  for  use  as 
money.  Obviously  the  latter  demand  is  made  less  than  it  would 
otherwise  be  if  various  forms  of  credit  are  used  to  help  perform  the 
work  done  by  standard  money,  or  if  the  conditions  are  such  that 
money  circulates  rapidly,  so  that  a  given  piece  does  so  much  the 
more  work. 

The  business  man  in  speaking  of  "the  value  of  money"  usually  has 
in  mind  the  current  rate  of  interest  which  can  be  obtained  for  money 
which  is  loaned.  This  should  not  be  confused  with  the  meaning  of 
the  term  as  it  is  used  by  the  economist — i.e.,  the  power  of  money  in 
exchange.  Since  this  is  measured  by  the  amount  of  every  other 
commodity  for  which  money  will  exchange,  the  value  of  money  is 
indicated  by  the  general  level  of  prices. 

Questions 

1 .  Does  the  demand  for  shoes  adequately  account  for  the  value  of 
leather  ?  Could  you  explain  the  value  of  gold  as  the  result  of  the 
demand  for  money? 

2.  What  is  meant  by  the  demand  for  money? 


EXCHANGE  73 

3.  If  Europe  ceased  to  use  gold  for  money  would  that  action  affect 
the  value  of  American  gold  coins  ?     If  so,  how  and  when  ? 

4.  If  dentists  discovered  a  cheap  filling  for  teeth  which  was  better 
than  gold  would  it  tend  to  alter  (a)  the  demand  for  gold?  {b)  the 
value  of  the  gold  eagle  ? 

5.  Should  you  expect  the  increasing  use  of  platinum  in  jewelry  to 
change  the  value  of  gold  ? 

6.  Is  gold  durable  ?  Is  it  ordinarily  destroyed  in  the  uses  to  which 
it  is  put  ?  Suggest  some  of  the  ways  in  which  gold  is  so  used  as  not 
to  be  recovered  for  subsequent  uses. 

7.  To  what  extent  is  the  supply  of  gold  derived  from  current 
l)roduction  ? 

8.  Does  the  value  of  gold  correspond  to  marginal  cost  of  produc- 
tion ?  How  is  the  relation  between  the  value  and  the  cost  of  produc- 
tion of  gold  influenced  by  (a)  the  speculative  character  of  gold  mining  ? 
(6)  the  amount  of  fixed  capital  involved  in  the  production  of  gold  ? 

g.  The  introduction  of  the  cyanide  process  for  extraction  of  gold 
so  decreased  the  cost  of  production  that  refuse  heaps  of  old  mines 
were  worked  over  again.  What  effects  should  you  expect  this  to  have 
upon  the  use  of  gold  in  the  arts  ?  upon  its  use  as  money  ?  What 
would  be  the  effect  upon  its  value  in  the  arts  ?  upon  its  value  as 
money  ? 

10.  A  certain  amount  of  gold  can  be  extracted  trom  sea  water, 
yet  this  extraction  is  not  generally  attempted.  Why  not?  Are 
there  any  conditions  under  which  this  might  be  resorted  to  ? 

11.  It  is  said  that  the  demand  for  money  consists  of  the  supply 
of  goods  offered  for  sale,  and  that  the  supply  of  money  constitutes  the 
demand  for  these  goods.  Explain.  Is  the  validity  of  this  statement 
affected  by  the  use  of  checks  and  other  substitutes  for  money  ? 

12.  How  would  the  value  of  money  be  affected  by  doubling  the 
amount  in  circulation  ?  To  what  extent  would  this  result  be  modified 
by  (a)  the  use  of  substitutes  for  money  ?  (b)  the  fact  that  one  piece 
of  money  may  effect  many  or  few  or  no  exchanges  in  the  course  of  a 
day,  according  to  circumstances?  Would  scarcity  of  money  itself 
affect  the  use  of  substitutes,  or  the  rai)idity  of  circulation  ? 

13.  What  is  the  "quantity  theory"  of  the  value  of  money? 
According  to  that  theory  is  the  value  of  money  independent  of  cost 
of  production  ?     Explain. 

14.  Can  live  ounces  of  gold  set  aside  for  use  in  llu'  arts  have  a 
different  value  from  the  same  amount  of  gold  in  a  coin  ?  If  so,  why  ? 
If  not,  why  not  ? 

15.  Would  a  seigniorage  tend  to  affect  the  value  of  money,  and  if 
so,  how  ? 

16.  Is  the  value  of  the  dolhir  fixed  and  stable  ? 


74  OUTLINES   OF  ECONOMICS 

ii.  The  Value  of  Other  Forms  of  Money 

Questions 

1.  What  must  be  done  to  keep  token,  subsidiary,  and  credit 
money  equal  in  value  to  the  standard  ? 

2.  The  value  of  gold  falls.  What  is  the  probable  effect  upon  (a) 
the  value  of  the  $5  gold  piece  ?  (b)  the  price  of  the  $5  gold  piece  ? 
(c)  the  value  of  wheat  ?  (d)  the  price  of  wheat  ?  (e)  the  value  of  the 
cent  piece  ?  (/)  the  value  of  the  dime  ?  (g)  the  value  of  an  ounce  of 
silver  ?   (h)  the  value  of  the  silver  dollar  ? 

3.  What  determines  the  value  of  the  silver  certificate?  of  the 
greenback  ?  of  the  national  bank  note  ? 

4.  Is  there  any  difference  between  the  value  of  the  bullion  in  a 
silver  dollar  and  the  value  of  a  silver  dollar?  If  so,  how  can  you 
explain  it  ? 

5.  During  the  Civil  War  the  value  of  the  greenback  fluctuated 
continually.  For  example,  after  a  union  victory,  the  greenback  rose 
in  value.     Why  ? 

e)  Gresham's  Law 

Questions 

1.  Suppose  a  man  has  borrowed  a  bushel  of  wheat  of  you.  Let  the 
government  now  pass  a  law  stating  that  debtors  may  pay  back 
iDorrowed  wheat  in  grain  of  either  good  or  poor  quality.  In  what 
quality  do  you  think  you  are  likely  to  be  paid  ? 

2.  If  you  were  to  get  some  gold  bullion  by  melting  coins,  should 
you  melt  full-weight  or  light-weight  coins  ?  Suppose  you  were 
desiring  to  ship  gold  out  in  international  payments:  which  kind  of 
coin  should  you  ship  ? 

3.  If  in  bullion  form  one  ounce  of  gold  equals  in  value  32  ounces 
of  silver,  and  by  a  legal  tender  law  it  is  provided  that  the  coins  made 
from  I  ounce  of  gold  shall  exchange  for  the  coins  made  from  16 
ounces  of  silver,  should  you  take  gold  to  the  mint  to  be  coined  ? 
Should  you  take  silver  to  the  mint  ? 

4.  Suppose  the  monetary  system  of  a  country  is  based  on  a  gold 
standard.  War  is  declared.  The  government  concludes  to  issue 
paper  money  which  it  decrees  shall  be  legal  tender  and  which  it 
promises  to  redeem  after  the  war  is  over.  Doubts  arise  whether  it 
will  ever  be  redeemed.  If  someone  owed  you,  would  he  pay  you  in 
paper  or  in  gold  ?  Why  ?  Should  you  have  any  option  in  the  matter  ? 
Would  gold  remain  in  circulation  ? 

5.  State  Gresham's  Law,  and  give  an  illustration  from  the  mone- 
tary history  of  the  United  States  of  a  case  where  it  operated. 


EXCHANGE  75 

6.  Is  there  any  reason  why  the  proportion  of  pure  metal  in  the 
subsidiary  coins  should  be  considerably  lower  than  the  proportion 
in  the  standard  coin  ? 


/)  The  Kinds  of  Standard 

i.  The  Single  Standard  (monometallism) 
ii.  The  Double  Standard  (bimetallism) 
iii.  The  Limping  Standard 

iv.  The  Tabular  Standard  and  the  Method  of  Index  Numbers 
V.  The  Paper  Standard  (fiat  money) 

Several  kinds  of  monetary  standard  have  been  adopted,  at  one 
time  or  another,  by  different  nations;  and  others  have  been  suggested. 
In  deciding  which  standard  is  best  the  main  criterion  is  stability  of 
value. 

i.  The  Single  Standard  (monometallism) 

Questions 

1.  Why  is  gold  more  stable  in  value  than  most  commodities? 

2.  Will  the  recent  adoption  of  the  gold  standard  by  a  number  of 
countries  tend  to  make  the  value  of  gold  more  stable,  for  the  time 
being  ?  in  the  long  run  ? 

3.  Has  the  production  of  gold  been  quite  regular,  or  have  there 
been  great  changes  in  the  output  ?  What  is  the  situation  at  the  pres- 
ent time  ? 

4.  Has  the  money  of  the  United  States  ever  been  based  on  a 
single  standard  ?     If  so,  when  ? 

5.  Suppose  a  country  has  a  gold  standard.  Will  that  mean  that 
it  may  not  have  silver  or  copper  coins  ?     May  it  have  credit  money  ? 

ii.  The  Double  Standard  (bimetallism) 

Questions 

1.  What  is  meant  l)y  bimetallism  ?  Have  we  ever  had  a  bimetal- 
lic standard  in  the  United  States  ?     If  so,  when  ? 

2.  What  is  meant  by  16  to  i  ?  Has  that  ratio  ever  l^een  adopted 
in  the  United  States,  and  if  so,  when  ?  Has  there  ever  been  any  other 
coinage  ratio  in  this  country  ? 

3.  On  what  ground  can  the  bimetallist  contend  that  bimetallism 
will  give  a  more  stable  standard  of  deferred  payments  ? 

4.  "So  long  as  the  government  coins  freely  and  gratuitously  both 


76  OUTLINES   OF  ECONOMICS 

gold  and  silver  at  a  fixed  coinage-ratio  of  value,  the  market  ratio 
between  the  value  of  gold  and  the  value  of  silver  will  automatically 
conform  to  the  coinage-ratio.  If,  for  example,  the  value  of  silver  on 
the  market  tends  to  fall,  silver  will  be  taken  to  the  mint  to  be  coined; 
and  in  consequence  the  tendency  to  a  fall  in  the  value  of  silver  will  be 
checked  by  the  increased  demand  for  silver  for  purposes  of  coinage; 
wliile  at  the  same  time  the  demand  for  gold  for  coining  will  fall  off." 
Explain  and  criticize  this  argument. 

5.  Would  bimetallism  be  more  likely  to  succeed  if  the  coinage- ratio 
chosen  were  near  the  existing  market  ratio  ?     Why  ? 

6.  Would  bimetallism  be  more  likely  to  succeed  in  a  country  which 
used  much  metal  in  its  currency  ?     Why  ? 

7.  Precisely  why  would  international  bimetallism  be  stronger 
than  national  bimetallism  ? 

8.  "Bimetallism  is  absurd.  It  would  result  first  in  gold  mono- 
metallism, then  in  silver  monometallism,  and  so  on."  What  does 
this  mean  ? 

9.  Is  Gresham's  Law  likely  to  come  into  operation  under  a  bimetal- 
lic standard  ?     If  so,  under  what  circumstances  ? 

10.  Is  there  anything  in  the  nature  of  mining  that  keeps  the  ratio 
of  the  supply  of  gold  to  the  supply  of  silver  nearly  uniform  ?  What 
light  does  the  history  of  the  output  of  these  metals  during  the 
nineteenth  century  throw  on  this  point  ? 

11.  At  the  time  of  Bryan's  free-silver  campaign  some  favored  a 
coinage  ratio  of  32  to  i  instead  of  16  to  i.  What  was  the  reason  for 
this  ?  If  you  had  had  to  decide  between  the  two,  which  ratio  should 
you  have  chosen  ? 

12.  If  the  United  States  were  now  to  adopt  bimetallism  at  the 
ratio  of  16  to  i,  what  changes  would  take  place  in  the  circulating 
medium  of  the  country  ? 

13.  If  the  United  States  had  free  coinage  at  16  to  i  and  the  market 
ratio  of  gold  and  silver  were  12  to  i,  what  would  be  the  effect  on  the 
circulating  medium  of  the  country  ? 

14.  From  1792  to  1834  our  coining  ratio  was  15  to  i  and  the  average 
market  ratio  was  about  15.61  to  i.  What  metal  tended  to  go  to  the 
mint  ? 

15.  From  1834  to  i860  our  coining  ratio  was  16  to  i  and  the 
average  market  ratio  was  about  1 5  .  63  to  i .  What  metal  tended  to 
go  to  the  mint  ? 

16.  What  was  the  "crime  of  1873"  ?  Why  did  the  measure  pass 
Congress  with  so  little  opposition  at  the  time  ? 

17.  What  was  the  specific  demand  of  the  free-silver  party  ?  When 
did  the  free-silver  movement  arise  ?  Why  did  it  come  when  it  did 
instead  of  earlier — say  about  1855  ? 


EXCHANGE  77 

i8.  What  different  classes  or  sections  of  the  country  wanted  free 
silver  ?     What  did  they  expect  to  gain  by  it  ? 

19.  What  legislation  was  passed  as  a  result  of  the  demands  of  the 
free  silverites  ?     What  were  the  consequences  of  that  legislation  ? 

20.  Is  there  more  or  less  reason  for  the  adoption  of  bimetallism 
by  the  United  States  now  than  there  was  about  1893  ? 

21.  Draw  up  a  chronology  of  the  monetary  history  of  this  country. 


iii.  The  Limping  Standard 

This  topic  requires  no  discussion.  The  term  is  used  to  express 
the  situation  in  those  countries  where  both  metals  have  unlimited 
legal  tender  power  but  where  only  one  is  coined  unlimitedly.  It 
marks  a  transition  from  the  double  to  the  single  standard.  France 
and  the  United  States  furnish  examples  of  a  limping  standard. 

iv.  The  Tabular  Standard  and  the  Method  oj  Index  Numbers 

A  change  in  the  value  of  money  and  a  change  in  the  level  of 
prices  are  but  two  ways  of  stating  the  same  fact — the  change  in  the 
exchange  ratios  between  money  and  goods.  The  fact  of  the  change 
implies  nothing  as  to. the  cause  of  the  change.  The  cause  may  be 
exclusively  on  the  gold  side,  or  exclusively  on  the  side  of  the  other 
goods,  or  it  may  be  a  cause  which  affects  both  sides. 

The  statistical  method  of  index  numbers  is  a  device  for  studying 
changes  of  price-level,  which,  whatever  their  causes,  are  attended  with 
serious  practical  consequences.  An  index  number  is  the  average  of  a 
series  of  price-ratios,  or  percentages,  each  of  which  represents  the 
relation  between  the  price  of  some  particular  commodity  at  the  date 
under  consideration,  and  the  price  of  the  same  commodity  at  a  previ- 
ous date  taken  as  a  "base,"  to  furnish  a  standard  of  comparison. 

Questions 

1.  Construct  an  index  number  based  on  assumed  prices  for  a 
dozen  commodities  at  two  different  periods,  showing  the  change  in 
the  value  of  money. 

2.  Why  is  "weighting"  sometimes  used  in  the  construction  of 
index  numbers?   Is  the  correction  important? 

3.  In  the  nineties  the  gold  party  declared  that  the  value  of  silver 
had  fallen  in  the  preceding  twenty-five  years;  the  silver  party  declared 
on  the  other  hand  that  it  was  not  a  fall  in  silver  which  had  taken  place, 
but  a  rise  in  gold.  How  should  you  go  about  it  to  tind  out  the  truth 
of  the  matter  ? 


78  OUTLINES  OF  ECONOMICS 

4.  Enumerate  some  of  the  influences  which  might  tend  to  raise 
or  lower  the  prices  of  a  large  number  of  commodities  independently 
of  any  change  on  the  part  of  the  standard. 

5.  Explain  how  the  method  of  index  numbers  might  be  used  in 
defining  a  tabular  standard  of  payments.  Do  you  think  such  a  stand- 
ard would  be  more  equitable  than  a  gold  standard  in  determining  the 
amount  of  long-deferred  payments  ? 

6.  Why  do  business  men  object  to  this  idea  of  the  tabular  standard  ? 

V.  The  Paper  Standard  (fiat  money) 

Questions 

1.  Is  it  hypothetically  possible  that  a  mere  paper  standard  could 
be  more  stable  in  value  than  the  gold  standard  ?  (This  question 
assumes  that  people  would  be  willing  to  accept  a  paper  standard.) 

2.  What  would  fix  the  value  of  such  paper  money?  Would  it 
be  determined  by  cost  of  production  ? 

3.  Is  it  true  that  if  we  used  paper  money  instead  of  gold  much 
social  outlay  would  be  saved  ? 

4.  Why  not  have  a  paper  standard  ? 

5.  Why  have  some  people  desired  it  ? 

6.  It  is  commonly  said  that  from  1862  to  1879  the  United  States 
had  a  paper  standard.  Does  this  refer  to  the  official  or  to  the  actual 
situation  ?  Even  with  reference  to  the  actual  situation,  were  people 
accepting  the  paper  money  because  the  government  ordered  it  or 
because  they  expected  it  to  be  redeemed  in  gold  at  some  time  ? 

2.  Credit  Exchange 

a)  Credit  and  Credit  Instruments 

h)  Credit  Institutions  (with  particular  reference  to  banking) 

By  far  the  greater  part  of  the  exchange  transactions  in  such  an 
industrial  society  as  that  of  the  United  States  is  performed  by  credit 
devices.  Some  analysis  of  these  devices  and  the  way  in  which  they 
operate  is  therefore  necessary. 

a)  Credit  and  Credit  Instruments 

Questions 

1.  Define  credit. 

2.  What  is  meant  by  book  credits?  checks?  promissory  notes? 
drafts  ?  bills  of  exchange  ? 

3.  Show  how  each  of  these  credit  devices  may  perform  money 
functions. 


EXCHANGE  79 

4.  Is  credit  capital  ?  Does  it  really  add  to  the  sum  total  of  instru- 
ments, or  does  it  merely  make  possible  a  better  utilization  of  instru- 
ments already  existing? 

5.  Could  credit  exist  unless  a  surplus  of  economic  goods  over  and 
above  immediate  needs  had  previously  been  accumulated  ? 

6.  "Credit  quickens  the  productive  process."  Do  you  agree? 
If  so,  in  what  way  does  it  do  so  ? 


b)  Credit  Institutions  (with  particular  reference  to  banking) 

i.  Principles  of  Banking 

ii.  Clearing-House  Operations 
iii.  Comparison  of  Banking  Systems 
iv.  Foreign  Exchange  (treated  under  "International  Trade") 


i.  Principles  of  Banking 

Questions 

1.  State  carefully  what  is  meant  by  (a)  discount,  {b)  deposit,  (c) 
issue. 

2.  What  forms  of  so-called  banking  can  you  enumerate?  Which 
of  these  forms  of  banking  do  you  regard  as  banking  in  the  strict 
and  typical  sense  ? 

3.  Which  of  the  three  fundamental  banking  functions  are  per- 
formed by  (c)  sa\dngs  banks,  {b)  trust  companies,  (c)  "bankers," 
in  the  sense  of  dealers  in  foreign  exchange  ? 

4.  On  what  sorts  of  security  do  banks  ordinarily  make  loans  ? 

5.  What  are  the  most  desirable  forms  of  investment  for  a  bank? 

6.  How  can  a  bank  fail  when  its  assets  are  greater  than  its  current 
liabilities  ? 

7.  "One  of  the  main  functions  of  a  bank  is  to  place  capital  with 
those  who  can  use  it  best.  This  aids  society  as  well  as  the  individual." 
Explain. 

8.  In  what  ways  may  a  deposit  account  be  created  ? 

9.  What  are  the  relative  advantages  and  disadvantages  of  checks 
and  banknotes  as  regards  (a)  convenience,  {b)  safety? 

10.  Why  should  any  more  care  l)e  taken  by  the  government  to 
protect  banknotes  than  to  ])rotect  deposits  ? 

11.  "An  effective  redemption  scheme  is  all  that  is  needed  to  secure 
either  notes  or  dejiosits."     Do  you  agree? 

12.  "A  bank  should  be  free  to  give  the  community  it  serves  the 
kind  of  service  desired.  If  deposit  currency  is  desired,  let  the  bank 
ha\e  freedom  in  giving  that  ser\ace.     Let  the  same  be  true  of  circula- 


8o  OUTLINES   OF  ECONOMICS 

tion."     What  is  meant  by  deposit  currency  ?  by  circulation  ?  Do  you 
agree  with  the  quotation  ? 

13.  "A  bank  wishes  a  strong  reserve."  "A  bank  wishes  as  small 
a  reserve  as  possible.  A  reserve  is  idle  money."  Can  these  state- 
ments be  reconciled  ? 

14.  "The  government  could  justly  tax  bank  issues  5  or  6  per  cent. 
In  the  United  States  banks  buy  bonds  and  collect  the  interest  on 
these  bonds.  They  issue  notes  on  the  basis  of  these  bonds  and  get 
interest  on  the  notes  also.  Thus  they  make  a  double  profit  and  so 
are  favored  over  other  businesses."     Do  you  agree  ? 

15.  On  which  side  of  a  bank  statement  should  the  following  items 
go  ?  Show  why  in  each  case:  overdraft,  expenses,  unpaid  dividends, 
certified  checks  outstanding. 

16.  Bank  X  has  the  following  items  in  its  account: 

Loans  and  discounts $380,000  Capital $100,000 

Bonds  and  stocks 21,000  Surplus 20,000 

Real  estate 12,000  Undivided  profits 8,000 

Notes 50,000  Due  from  banks 40,000 

Deposits 350,000  Cash 60,000 

Other  assets 15,000 

A)  Arrange  these  items  as  they  should  stand  in  a  regular 
'  statement. 

B)  Taking  this  statement  as  a  basis,  account  for  the  following 
transactions: 

a)  The  bank  discounts  $50,000  of  commercial  paper  for  3 
months  at  4  per  cent  per  annum,  making  half  the  advance 
in  cash  and  half  in  deposits. 

b)  $70,000  of  loans  are  paid  up  at  maturity.  $10,000  of  this 
payment  is  made  in  cash;  $15,000  in  the  notes  of  this 
bank;  and  the  remainder  in  checks  drawn  upon  this  bank. 

c)  A  dividend  of  2  per  cent  is  declared,  of  which  j  is  credited 
to  depositors  and  f  paid  in  cash. 

d)  The  real  estate  increases  in  value  by  $3,000. 

e)  $5,000  is  added  to  surplus. 

Balance  the  completed  account.  What  is  now  the  proportion 
of  reserve  to  demand  liabilities  ?     What  was  the  proportion  originally  ? 

17.  Taking  as  basis  the  statement  at  the  beginning  of  the  previous 
(juestion,  account  for  the  following  transactions: 

a)  The  bank  cashes  checks  on  other  banks  to  the  amount  of 
$2,500  and  for  the  time  being  holds  the  checks  before 
collecting  them. 

b)  New  deposit  accounts  are  created  to  the  extent  of  $10,000 
by  the  deposit  of  checks  on  other  banks. 


EXCHANGE  8i 

c)  $5,000  of  loans  prove  bad  and  are  not  paid  at  maturity,  but 
the  bank  partially  escapes  loss  by  taking  $4,000  worth  of 
bonds  and  stocks  which  it  held  as  collateral  for  the  loans. 

d)  The  bank  sells  for  cash  at  face  value  a  draft  for  $1,000, 
drawn  by  it  against  another  bank  with  which  it  carries  a 
deposit  account. 

Balance  the  completed  account.  What  is  the  proportion  of  reserve 
to  demand  liabilities  ? 

ii.  Clear ing-House  Operations 

Questions 

1.  When  the  butcher  and  the  baker  cancel  from  their  books  equal 
accounts  against  each  other,  is  this  in  the  nature  of  a  clearing  trans- 
action ? 

2.  When  you  deposit  checks  in  your  bank  and  draw  others  in  favor 
of  your  creditors,  does  the  bank  actually  move  money  about?  If 
all  the  parties  interested  dealt  with  the  same  bank,  would  that  bank 
serve  as  a  sort  of  clearing-house  for  these  individuals  ? 

3.  What  is  the  immediate  function  of  a  clearing-house?  What 
are  some  of  the  indirect  advantages  ? 

4.  Distinguish  between  clearing-house  certificates  and  clearing- 
house loan  certificates. 

5.  Are  clearing-houses  more  important  for  checks  than  for  notes? 
Why  ?  Can  you  give  instances  of  the  practice  of  redeeming  bank- 
notes through  a  clearing-house  ? 

6.  Why  is  the  expedient  of  combined  reserves  resorted  to  ?  What 
is  the  fundamental  advantage  of  the  expedient  ?  Would  it  be  advan- 
tageous to  combine  the  reserves  of  New  York  banks  regularly  and 
permanently  ? 

7.  "Combined  reserves  strengthen  banks  in  their  dealings  with 
each  other,  i.e.,  through  the  clearing-house.  Equalized  reserves  aid 
])anks  in  their  drains  over  the  counter."  What  does  this  mean  ? 
Is'it  true  ? 

8.  Why  in  the  United  States  do  we  trouble  about  combined 
reserves  ?     Is  there  really  less  money  in  the  country  in  time  of  panic  ? 

9.  How  does  the  issue  of  clearing-house  loan  certificates  affect  the 
power  of  banks  to  lend  ?  Are  they  profitable  to  the  banks  ?  Do 
they  stay  out  long  ? 

10.  Are  weekly  reports  of  clearings  any  true  indication  of  the 
prosperity  of  business  in  general  ?     Explain. 

11.  Are  payments  in  settlement  of  stock  transactions  in  Wall 
Street  (and  elsewhere)  included  in  clearings  ?  To  what  extent  does 
the  volume  of  such  payments  reflect  business  prosperity  ? 


82 


OUTLINES   OF   ECONOMICS 


12.  Do  all  checks  pass  through  the  clearing-house? 

13.  How  do  banks  not  members  of  clearing-house  associations 
manage  their  exchanges  ? 

iii.  Comparison  of  Banking  Systems 

Questions 

I.  Draw  up  a  comparative  statement  in  the  form  indicated  below 
to  show  the  regulations  and  policies  of  the  Bank  of  France,  the  Bank 
of  England,  the  Reichsbank,  and  the  national  banks  of  the  United 
States. 


Bank  of 
France 

Bank  of 
England 

Reichs- 
bank 

National 
Banks  of 
the  U.S. 

Dat 
t 

e  of  establishment  and  reasons  for  es- 
aV>H=;hmpnt"                               

Owr 

lership 

Mar 

laeement 

Financial  relations  with  government 

Cap 

ital* 

Surj 

)lus* 

Kxtent  of  monoDolv  of  issue 

Nature  of  the  limitation  of  the  amount 
of  issue 

S 

Provisions  for  security 

% 

Elasticitv 

Le£?al  tender  DOwers 

Proportion  to  liabilities 

u 

s 

Comoosition   

3 

^A 

Policy  of  maintenance  in  crisis 

*In  giving  iigures  for  capital,  etc.,  give  amounts  in  the  currency  of   the   respective  coun- 
tries, with  the  equivalent  sum  in  dollars  in  parentheses. 

2.  What  provisions  of  law,  peculiar  to  the  United  States  national 
banking  system,  interfere  with  the  reasonable  extension  of  bank  credit 
(including  deposits  and  notes)  in  time  of  financial  stringency  ? 


EXCHANGE  83 

3.  What  has  been  the  effect  of  suspending  the  act  of  1844  during 
periods  of  embarrassment  for  the  Bank  of  England  ?  Would  experi- 
ence suggest  the  repeal  of  the  act,  to  give  the  bank  greater  freedom 
at  all  times  ? 

4.  Why  is  a  large  reserve  maintained  (a)  by  the  Bank  of  France  ? 
(b)  by  the  Bank  of  England  ? 

5.  Explain  in  detail  whether  or  not  the  following  statement  would 
represent  a  proper  condition  of  the  »-th  National  Bank  of  Pittsburgh: 

Capital $150,000        Loans $500,000 

Surplus 25,000        U.S.  bonds 55, 000 

Undivided  profits 5, 000        Other  bonds  and  stocks 125,000 

Deposits 600,000         Real  estate 90,000 

Notes 160,000        Other  assets 25,000 

Due  from  banks 80,000 

Deposited  with  U.S.  treasurer        7,000 

Specie  and  legal  tender 5 5, 000 

6.  Rank  the  national  banks  of  the  United  States,  the  Bank  of 
England,  the  Bank  of  France,  and  the  Reichsbank  in  the  order  of 
(a)  security  of  notes;  (b)  elasticity  of  note-issue;  (c)  elasticity  of 
banking  credit  in  general;  (d)  reserve  against  deposits;  (e)  propor- 
tion of  deposits  to  notes;  (/)  closeness  of  governmental  control  or 
supervision. 

7.  Why  is  an  elastic  currency  desirable  ?  Which  of  the  means  of 
payment  in  common  use  in  this  country  are  elastic  ? 

8.  State  briefly  the  essential  provisions  of  the  Aldrich-Vreeland 
Act  of  1908  and  explain  their  purpose. 

9.  Why  do  not  bankers  in  England  and  Germany  resort  to  com- 
bined reserves  in  time  of  panic  as  is  done  in  this  country  ? 

10.  Do  the  reasons  which  make  a  speedy  redemption  of  bank 
notes  desirable  apply  in  the  United  States  today? 

11.  Give  the  arguments  for  and  against  state  guarantee  of  bank 
deposits. 

12.  Give  the  arguments  for  and  against  a  central  bank  of  issue 
in  the  United  States  today. 

iv.  Foreign  Exchange  (treated  under  "  International  Trade") 


IV.  International  Trade 

1.  The  Principles  Determining  TnternationaJ  Trade 

2.  The  Balance-oJ-Trade  Idea 

3.  Foreign  Exchange  and  International  Payments 

4.  Regulation  of  International  Trade  (with  particular  reference 
to  the  protective  tariff) 


84  OUTLINES   OF  ECONOMICS 

International  trade  does  not  differ  essentially  from  domestic 
trade.  The  motives  leading  to  trade  between  inhabitants  of  the 
United  States  and  inhabitants  of  England  are  not  different  from  the 
motives  leading  to  trade  between  inhabitants  of  Illinois  and  inhabit- 
ants of  California.  It  has  become  customary,  however,  to  give 
separate  treatment  to  international  trade,  largely  because  such 
trade  is  almost  everywhere  the  subject  of  special  regulation  by 
government. 

I.  The  Principles  Determining  International  Trade 

a)  Trade  Based  upon  Insuperable  Differences  of  Economic  Condi- 
tions (e.g.,  trade  between  tropical  and  temperate  regions) 

b)  Trade  Based  upon  Differences  Constituting  Reciprocal  Superiority 
(one  region  being  superior  in  one  line,  the  other  region  being 
superior  in  a  different  line,  e.g.,  American  export  of  breadstuff s 
to  Cuba  in  exchange  for  sugar) 

c)  Trade  Based  upon  Differences  Constituting  Relative  Superiority 
(e.g.,  American  wheat  in  exchange  for  British  steel) 

Given  two  regions  where  in  each  case  the  one  is  able,  through 
natural  endowment  or  character  of  population,  to  produce  goods 
which  the  other  cannot,  it  is  natural  that  trade  should  arise.  It  is 
not  difficult  to  see,  furthermore,  that  given  two  regions  where  one 
has  a  superiority  (though  not  a  monopolistic  superiority)  in  one 
commodity  while  the  other  region  has  a  superiority  (though  again 
not  a  monopolistic  superiority)  in  another  commodity,  trade  is  again 
a  natural  result.  The  third  case  is  somewhat  more  puzzling.  Given 
two  regions,  one  of  which  is  superior  to  the  other  in  both  lines  of 
production,  trade  may  arise  provided  the  superior  region  is  relatively 
stronger  (compared  with  the  inferior  region)  in  one  line  of  production 
than  it  is  in  the  other  line. 

Note. — In  every  country  natural  advantages  in  production  are 
reflected  in  the  rates  of  wages  and  interest.  In  a  country  of  superior 
advantages,  the  rates  of  wages  and  interest  are  likely  to  be  high. 
Thus  in  the  United  States,  the  natural  endowment  of  which  is  especially 
rich,  wages  are  higher  than  in  any  other  country;  interest  rates 
are  also  higher  than  in  Western  Europe.  It  follows  that  in  industries 
requiring  a  relatively  great  expenditure  of  labor  and  an  extensive 
capital  equipment,  as  in  many  branches  of  manufacture,  money 
costs  of  production  are  likely  to  be  higher  in  the  United  States  than  in 
Europe,  in  spite  of  the  fact  that  American  workmen  are  often  more 
efficient  than  European,  and  of  the  further  fact  that  American  capital 
frequently  takes  the  form  of  better  equipment  than  that  of  European 
countries.     The  money  cost  of  production  in   the  United  States  is 


EXCHANGE  85 

likely  to  be  relatively  low  in  the  industries  that  make  a  large  drain 
upon  natural  resources  and  require  comparatively  little  use  of  labor 
and  capital,  as  in  many  of  the  extractive  industries. 

With  the  steady  increase  in  population  and  capital,  the  United 
States  gradually  overcomes  the  disadvantages  that  lie  in  the  way 
of  successful  manufacture.  Owing  to  the  operation  of  the  law  ot 
diminishing  returns  it  loses  gradually  its  advantages  in  extractive 
industries.  Accordingly,  even  without  interference  on  the  part  of 
the  government,  the  United  States  would  become  more  and  more  a 
manufacturing  nation  and  become  less  and  less  engaged  in  extractive 
industries. 

Questions 

1.  A  is  a  good  musician  but  is  temperamentally  unfitted  for  other 
work.  B,  while  fond  of  music,  is  efficient  only  in  farming.  Is  an 
exchange  likely  to  take  place?  Would  the  situation  be  different  if 
A  and  B  represented  regions  of  different  natural  endowment  ? 

2.  A  by  one  day's  labor  can  make  nine  units  of  x  or  two  units  of  y. 
B  by  one  day's  labor  can  make  two  units  of  x  or  nine  units  of  y. 
Would  specialization  and  exchange  be  likely  to  take  place  ?  Would 
the  situation  be  different  if  A  and  B  represented  regions  instead  of 
men? 

3.  A  by  one  day's  labor  can  make  20  units  of  x  or  10  units  of  y. 
B  by  one  day's  labor  can  make  1 5  units  of  x  or  5  units  of  y.  Would 
specialization  and  exchange  be  likely  to  take  place?  Would  the 
situation  be  different  if  A  and  B  represented  regions  instead  of  men  ? 

4.  A  is  a  very  able  lawyer  and  also  a  very  skilful  stenographer. 
Is  it  surprising  that  he  confines  himself  to  the  law  and  hires  a  stenog- 
rapher who  is  much  less  skilful  ? 

5.  In  the  eight  months  ending  August  i,  1909,  the  export  and 
import  trade  of  the  United  States  with  Europe  amounted  to  $1,323,- 
000,000;  the  export  and  import  trade  with  South  America  amounted 
to  $166,000,000.  Do  you  believe  that  the  relative  volume  of  the 
two  branches  of  our  foreign  trade  will  be  the  same  fifty  years  from 
now  ?     Why  ? 

6.  Every  imi)ortant  commercial  nation  has,  in  the  last  two  decades, 
endeavored  to  establish  control  over  some  portion  of  the  tropics. 
Explain  this  fact  on  the  basis  of  the  conditions  underlying  inter- 
national trade. 

7.  When  China  becomes  modernized  can  the  United  States  expect 
to  export  to  that  country  large  quantities  of  (a)  manufactures?  {h) 
agricultural  products  ? 

8.  If  Canada  were  annexed  to  the  United  States,  would  the 
character  of  the  trade  between  the  two  regions  be  changed  ? 


86     ,  OUTLINES   OF  ECONOMICS 

9.  An  American  statesman  of  the  nineteenth  century  declared 
that  it  was  bad  policy  for  the  United  States  to  import  any  commodity 
that  could  be  produced  in  the  United  States  ?     Do  you  agree  ? 

10.  Another  statesman  urged  that  no  commodity  which  can  be 
produced  in  the  United  States  with  the  same  amount  of  labor  as  in 
foreign  countries  could  be  economically  imported.  Do  you  think 
this  position  tenable? 

11.  It  has  been  asserted  that  the  income  of  the  citizens  of  the 
United  States  could  be  greatly  augmented  if  all  commodities  now 
imported  were  produced  at  home,  and  all  commodities  now  exported 
were  consumed  at  home.  The  cost  of  transportation,  now  amount- 
ing to  several  hundred  millions  annually,  would  thus  be  saved.  Apply 
this  argument  to  trade  between  the  Middle  West  and  the  Pacific 
slope,  and  expose  the  fallacies  involved  in  it. 

12.  "When  we  buy  goods  abroad,  we  get  the  goods  and  the 
foreigner  gets  the  money.  When  we  buy  goods  at  home  we  get  the 
goods  as  before,  but  the  money  remains  in  this  country."  Is  this  a 
valid  argument  against  importing  foreign  products? 

13.  From  your  knowledge  of  the  development  of  wants  under 
modern  conditions,  should  you  argue  that  international  trade  will 
tend  to  increase  or  to  diminish  in  the  future  ? 

14.  What  accounts  for  the  fact  that  England  exports  cutlery  and 
fine  hardware  to  all  parts  of  the  world  ?  Is  it  due  simply  to  superior 
resources  of  coal  and  iron  ? 

15.  Is  international  trade  likely  to  be  permanent  if  based  upon 
(a)  differences  of  climate  and  other  natural  conditions  ?  (b)  differences 
in  relative  supply  of  land  ?  (c)  differences  in  relative  supply  of  capital  ? 
(d)  differences  in  character  of  population  ?  Tell  why  you  answer  as 
you  do  in  each  case. 

2.  The  Balance-of-Trade  Idea 

The  doctrine  of  the  balance  of  trade,  although  it  is  of  relatively 
little  significance  in  the  economic  science  of  the  present  day,  has 
historically  been  im])()rtant.  It  merits  discussion  at  this  point 
chiefly  because  of  its  lingering  influence  upon  uncritical  public  opinion 
and  because  of  its  relation  to  the  subject  of  the  international  exchanges. 

Questions 

1.  What  is  meant  by  an  unfavorable  balance  of  trade? 

2.  What  items  have  to  be  taken  into  account  in  determining  the 
balance  of  trade  ? 

3.  Does  the  term  balance  of  trade  refer  to  a  balance  between  one 
nation  and  another  nation  or  between  one  nation  and  the  rest  of  the 
world  ? 


EXCHANGE  87 

4.  The  United  States  imports  heavily  from  South  America  but 
exports  very  little  to  that  continent.  Is  there  any  way  in  which  the 
resulting  indebtedness  can  be  settled  without  a  transfer  of  money? 
If  so,  explain  how. 

5.  How  did  the  American  colonies  pay  for  their  imports  of  British 
manufactures  ? 

6.  It  is  argued  that  imports  of  foreign  goods  may  result  in  the 
necessity  of  exporting  money  to  pay  for  them,  and  that,  therefore, 
where  such  is  the  case,  such  imports  should  be  stopped.  Do  you 
agree  ? 

7.  In  the  seventeenth  century  many  nations  tried  to  regulate 
trade  so  as  to  bring  money  into  the  country  and  keep  it  from  going 
out.     Was  their  plan  a  wise  one  ? 

8.  Could  a  country  continue  to  export  gold  for  a  long  period  of 
time  ?     If  not,  why  not  ?     If  so,  under  what  conditions  ? 

g.  The  value  of  British  imports  is  nearly  $1,000,000,000  in  excess 
of  the  value  of  British  exports  and  an  excess  of  imports  has  continued 
for  many  years.     How  can  you  explain  this  ? 


3.  Foreign  Exchange  and  International  Payments 

Questions 

1.  Make  a  list  of  the  causes  which  may  lead  to  a  flow  of  money 
from  one  country  to  another. 

2.  Explain  the  steps  in  the  mechanism  of  foreign  exchange  by 
which  a  Chicago  importer  can  pay  a  debt  which  he  owes  in  London. 

3.  What  is  the  par  of  exchange  ?     How  is  it  determined  ? 

4.  What  are  the  gold  points  ?  Why  does  not  exchange  normally 
rise  above  the  upper  gold  point  or  fall  below  the  lower  gold  point  ? 

5.  "The  nations  of  the  world  should  adopt  a  uniform  system  of 
currency  with  a  common  standard.  This  would  do  away  with  all 
this  liother  about  'par  of  exchange,'  'gold  points,'  'rate  of  exchange,' 
etc."     Why  or  why  not? 

6.  What  persons  deal  in  foreign  exchange? 

7.  "The  rate  of  exchange  is  simply  another  case  of  the  apjjlica- 
tion  of  the  principle  of  demand  and  supply.  Given  two  trading 
regions,  if  the  payments  due  each  from  the  other  are  equal,  exchange 
will  be  at  par.  If  an  unequal  balance  exists,  demand  will  exceed 
supply,  or  vice  versa,  and  the  rate  of  exchange  will  move  away  from 
parity."  Take  two  regions,  assume  certain  trading  operations,  and 
demonstrate  this  assertion. 

8.  Is  the  rate  of  exchange  on  London  likely  to  fall  below  par  at 
one  period  of  the  year  and  rise  above  yiar  at  another?  If  so,  when 
and  why  ? 


88  OUTLINES   OF   ECONOMICS 

ft 

9.  If  a  Chicago  merchant  imports  coffee  from  Brazil,  and  nobody 
in  Brazil  imports  goods  from  the  United  States,  how  could  the  debt 
be  paid  with  foreign  exchange? 

10.  "International  payments  are  made  by  credit  instruments  as 
long  as  they  last.     Gold  flows  only  as  a  last  resort."     Explain. 

1 1 .  If  there  should  be  a  failure  of  the  cotton  crop  next  year,  would 
there  be  any  effect  upon  international  exchange  ? 

12.  Would  a  rise  in  the  rate  of  interest  in  New  York  tend  to  affect 
the  international  flow  of  gold  ?  Would  it  tend  to  affect  the  rate  of 
exchange  on  London  ? 

13.  How  would  the  opening  of  rich  gold  mines  in  the  United  States 
tend  to  affect  the  rates  of  foreign  exchange  ? 

14.  Would  a  rise  in  prices  due  to  an  inflated  paper  currency,  such 
as  took  place  during  the  Civil  War,  increase  imports  ? 

15.  How  is  a  country  like  England,  which  has  no  gold  mines, 
supplied  with  gold? 

16.  Can  gold  have  a  lower  value  in  England  than  in  the  United 
States  ? 

17.  Would  the  discovery  of  a  rich  field  of  gold  in  the  United 
States  increase  or  diminish  the  real  wealth  of  England  ? 

18.  How  does  it  concern  the  people  of  the  United  States  whether 
or  not  a  foreign  country  adopts  the  gold  standard  ? 

ig.  Should  you  expect  gold  to  have  a  lower  value  in  Alaska 
than  in  England  ?     How  great  could  such  a  difference  in  value  be  ? 

20.  In  the  long  run  international  payments  tend  to  take  the  form 
of  commodities,  rather  than  of  exchange  or  of  specie.  Explain  the 
way  in  which  (a)  rates  of  foreign  exchange  stimulate  exports  at  times 
when  imports  are  in  excess;  (b)  flow  of  money  automatically  gives 
place  to  movement  of  goods. 


4.  Regulation  of  International  Trade  (with  particular  reference 
to  the  protective  tariff) 

Questions 

1.  What  is  the  distinction  between  a  protective  tariff  and  a 
tariff  for  revenue  only  ? 

2.  It  was  once  thought  by  some  that  if  one  person  gained  in  trade 
the  other  lost.  Do  you  beheve  this  ?  Would  such  a  theory  hold  true 
as  regards  trade  between  nations? 

3.  Assuming  it  to  be  constitutional,  would  it  be  wise  for  the  state 
of  Illinois  to  levy  tariff  duties  on  goods  brought  in  from  other  states  ? 

4.  If  the  duty  on  oranges  were  sufflciently  high  it  might  be  possible 


EXCHANGE  89 

to  develop  the  orange-growing  industry  in  Illinois.     Would  it  not 
be  wise  to  do  so  ? 

5.  It  is  argued  that  the  protective  tarifif  by  making  it  profitable 
to  carry  on  an  industry  increases  the  output  and  engenders  a  compe- 
tition which  ultimately  lowers  prices.  Do  you  think  so  ?  How  does 
this  argument  agree  with  the  argument  that  a  permanent  tariff  is 
needed  ? 

6.  What  is  the  infant-industry  argument  ?  Is  it  economically 
sound  in  your  opinion  ?  Does  it  apply  to  the  conditions  in  the  United 
States  today  ? 

7.  At  one  time  it  was  argued  that  because  wages  were  high  in 
this  country  a  tarifif  was  necessary  to  protect  the  manufacturers 
against  European  products  made  by  cheaper  labor.  At  a  later  period 
it  was  argued  that  wages  were  high  because  of  the  tariff,  therefore 
the  tariff  should  be  continued  in  order  to  keep  up  the  high  level  of 
wages.     Can  these  statements  be  reconciled  ?     Are  they  correct  ? 

8.  Can  one  without  inconsistency  use  the  infant-industry  argument 
and  at  the  same  time  argue  for  a  permanent  tariff  to  protect  labor  ? 

9.  Protectionists  assert  that  a  developed  and  sheltered  "home 
market"  is  of  great  benefit  to  sellers  and  buyers  alike.  Is  such  a 
home  market  worth  the  cost  of  protection  (a)  to  the  manufacturer? 
(b)  to  the  consumer  ? 

10.  "If  universal  free  trade  were  practicable  it  would  doubtless 
be  economically  desirable.  In  actual  fact,  however,  most  commercial 
nations  maintain  protective  tariffs;  and  consequently  no  single 
nation  can  afford  to  adopt  a  free  trade  policy,  which  would  ])ut  it  in 
the  position  of  exempting  foreign  manufactures  from  duties  while 
its  own  manufactures  were  taxed  in  foreign  ports,  and  would  deprive 
it  of  the  power  to  secure  tariff  concessions  from  other  countries  by 
threats  of  retaUatory  tariff  rates."  What  do  you  think  of  this 
argument  ? 

11.  One  contention  in  favor  of  a  protective  tariff  for  a  nation  with 
highly  developed  industries  is  the  claim  that  such  a  tariff  is  necessary 
to  {prevent  the  "dumping"  of  goods  by  foreign  makers,  and  conse- 
quent depression  of  the  home  market.  Is  this  a  valid  argument  ? 
Does  it  make  any  difference  whether  the  "dumping"  is  persistent  or 
sporadic?  Would  "dumping"  be  a  serious  evil  if  there  were  general 
free  trade  ? 

12.  Nation  A  levies  no  protective  duties,  and  has,  as  a  result, 
highly  specialized  industry,  the  products  of  which  it  exports  in  ex- 
change for  foodstuffs.  Nation  B,  by  heavy  j)rotective  duties,  has 
artificially  forced  the  diversification  of  its  industries.  Which  nation 
is  better  prepared  for  war  ?     Which  is  better  prepared  for  peace  ? 

13.  Do  you  think  that  considerations  of  military  necessity,  social 


90  OUTLINES   OF   ECONOMICS 

solidarity,  and  the  cultural  advantages  of  advanced  and  diversified 
industry  have  a  more  or  a  less  important  bearing  upon  tariff  problems 
than  the  economic  question  of  the  cheapness  of  goods  ?  Are  they 
independent  of  the  cheapness  of  goods  ? 

14.  "The  protective  tariff  not  only  protects  American  industry: 
it  also  forces  the  European  producer  to  pay  for  most  of  the  expenses 
of  running  our  government."     Do  you  agree? 

15.  Who  actually  pays  {)rotective  duties?  Do  you  suppose  the 
revenue  to  the  government  is  as  great  as  the  increased  expense  caused 
to  consumers  of  imported  goods  ? 

16.  Suppose  that  the  levying  of  a  protective  duty  on  a  commodity 
never  before  produced  within  the  country  has  so  stimulated  domestic 
industry  that  only  one-fourth  of  the  quantity  of  this  commodity 
consumed  in  the  country  is  now  imported.  How  great  will  be  the 
expense  to  consumers  due  to  the  imposition  of  the  duty  ?  How  great 
will  be  the  customs  revenue  to  the  government  ?  What  becomes  of 
the  difference  ?     Does  the  government  get  any  of  it  ? 

17.  "Everything  we  buy  abroad  diminishes  by  so  much  the 
demand  for  American  labor."     Comment. 

18.  When  did  the  United  States  adopt  a  pohcy  of  high  protective 
duties  and  what  were  the  reasons  put  forward  at  the  time  ? 

ig.  Why  has  the  South  favored  free  trade? 

20.  What  are  the  reasons  for  the  growing  demand  for  a  reduction 
of  the  tariff  ? 

21.  Explain  the  attitude  of  the  different  sections  of  the  country 
toward  the  tariff  at  the  present  time. 

22.  What  arguments  can  be  advanced  in  favor  of  continuing  the 
policy  of  protection  in  the  United  States  ? 

23.  We  have  had  protection  and  the  country  has  prospered  greatly; 
therefore  protection  should  be  continued.     Do  you  agree  ? 

24.  What  is  reciprocity  ?  Has  it  any  advantages  over  (a)  unquali- 
fied protection  ?    (b)  absolute  free  trade  ? 

25.  Would  it  be  more  economical  to  aid  American  industries  by 
giving  them  a  bounty  equal  to  the  protective  duty  instead  of  that 
duty? 

26.  Why  do  we  not  have  export  duties  in  the  United  States  ? 
If  export  duties  were  imposed,  whom  would  they  benefit  ? 

27.  How  would  the  adoption  of  free  trade  affect  the  American 
laborer?  Which  would  better  protect  x\merican  labor,  high  tariff 
duties  or  laws  restricting  immigration  ? 

28.  What  is  the  effect  of  a  protective  tariff  on  the  conservation 
of  natural  resources  ? 

29.  Who  really  determines,  in  this  country,  whether  an  industry 
shall  be  protected?  Who  determines  what  amount  of  protection 
shall  be  given  ?     Is  the  method  a  scientific  one  ? 


F.     THE  DISTRIBUTIVE  PROCESS 

I.  Introductory 

II.  Rent 

III.  Wages  and  Trade  Unionism 

IV.  Interest 
V.  Profits 


I.  Introductory 

We  have  to  do  here  with  the  sharing  among  the  members  of  society 
of  the  economic  goods  produced — of  the  social  dividend.  How  do 
men  secure  shares  of  this  social  dividend  ?  What  determines  the 
amount  of  their  shares  ?  Of  course,  these  shares  are  derived  ulti- 
mately from  ])roduction,  and  as  industry  is  now  organized  the  social 
dividend  is  distributed  in  the  first  instance  mainly  among  the  pos- 
sessors of  the  productive  agents.  The  laborer  receives  wages;  the 
landlord,  rent;  the  capitaUst,  interest;  and  the  entrepreneur,  profits. 
Ordinarily  the  payment  is  made  in  the  medium  of  exchange,  money. 
But  money- wages,  money-rents,  etc.,  are  merely  the  nominal  shares 
in  the  distribution  of  wealth,  and  are  technically  called  nominal 
wages,  nominal  rents,  etc.,  accordingly.  Real  wages,  rents,  interest, 
and  profits  are  shares  or  specific  incomes  of  goods,  and  these  shares 
plus  taxes,  etc.,  make  up  the  amount  of  the  social  income  or  social 
dividend — the  total  of  goods  available  for  current  use. 

The  determination  of  these  distributive  shares  is  not  of  course 
effected  in  practice  hy  formal  division  of  the  social  dividend  as  a  lump 
sum.  The  term  social  income  does  not  refer  to  goods  actually  col- 
lected together  as  an  aggregate,  or  administered  collectively  for  soci- 
ety. Practically,  wages,  interest,  and  rent  are  fixed  by  the  bargains  of 
entrepreneurs,  and  represent  what  they  pay  for  labor  and  for  the 
use  of  capital  and  land.  In  other  words,  the  problems  in  distribution 
are  problems  in  value.  At  this  point  the  principles  of  value  should  be 
reviewed  and  the  forces  and  manifestations  of  both  demand  and  supply 
should  be  recalled  to  mind. 

It  is  not  contended  that  in  actual  practice  all  individual  incomes 
are  in  exact  proportion  to  productive  service  rendered.  In  ihe  indi- 
vidual case,  shares  in  the  social  dividend  are  secured  in  many  ways  and 
a  multitude  of  forces  bear  upon  the  matter.     For  example,  shares  of 

91 


92  OUTLINES   OF   ECONOMICS 

the  social  di\idcnd  are  often  the  result  of  t,'ift,  inheritance,  customary 
or  legal  appropriation,  force,  fraud,  or  theft.  Most  incomes  of  adult 
persons,  however,  are  received  because  of  direct  or  indirect  partici- 
pation in  the  productive  process. 

Questions 

1.  Was  there  any  distributive  problem  when  each  household  was 
economically  self-sufficient  ? 

2.  A  man  devotes  his  time  and  effort,  and  the  use  of  tools  and  land 
which  he  owns,  to  the  making  of  one  commodity,  which  he  sells. 
Does  his  income,  as  a  practical  matter,  depend  on  the  principles  of 
exchange  or  on  the  principles  of  distribution  ? 

3.  Four  men.  A,  B,  C,  D,  co-operate  in  producing  a  commodity. 
A  provides  the  land,  B  furnishes  the  capital,  C  does  the  manual  work, 
and  D  watches  the  market  and  cUrects  the  production.  Explain 
whether  principles  of  exchange  or  principles  of  distribution  determine 
(a)  the  aggregate  earnings  of  the  four  men ;  (b)  the  earnings  of  each 
man  individually. 

4.  If  a  man  co-operates  with  others  in  making  one  commodity, 
can  he  expect  to  get  more  than  a  share  of  the  product  ?  Try  to  answer 
the  question:  What  determines  the  extent  of  the  share  he  can  secure  ? 

5.  "The  distribution  of  wealth  has  become  a  practical  problem 
because  of  speciahzation  in  industry."     Comment. 

6.  "The  theory  of  distribution  is  the  theory  of  value  applied  to 
the  valuation  of  productive  services."     Do  you  agree? 

7.  "Since  real  wages,  rent,  interest,  and  profits  are  shares  of 
goods,  they  must  be  paid  from  the  products  of  industry  already  past; 
for  the  goods  which  any  given  land,  labor,  and  capital  are  in  process 
of  producing  are  not  yet  available."     Why  or  why  not  ? 

8.  In  view  of  the  gradual  expansion  of  industry,  will  past  products 
available  for  the  payment  of  real  wages,  interest,  etc.,  ordinarily 
be  equal  in  amount  to  the  output  which  those  who  receive  the  pay- 
ment are  currently  engaged  in  producing?  Does  this  suggest  an 
element  of  unfairness  in  distribution  ?  Does  it  suggest  a  motive  for 
continued  production  ? 

9.  Can  you  say  which  is  more  important,  the  productive  process 
or  the  distributive  process  ?     Are  they  entirely  separate  and  chstinct  ? 

10.  "The  only  question  of  any  real  significance  in  economics  is 
the  question  of  distribution.  Give  us  proper  distribution."  Do 
you  think  the  amount  to  be  divided  has  any  significance  ? 


THE   DISTRIBUTIXE    PROCESS  •      93 

II.  Rent 

1.  Introductory 

2.  The  Differential  Return  (without  necessary  reference  to  any 
particular  system  of  land  ownership) 

3.  The  Relation  of  Economic  Rent  to  Contract  Rent  under  a  Regime 

of  Private  Property 

4.  Rent  and  Cost  of  Production 

5.  Rent  in  Relation  to  Taxation 

6.  Rent  and  Social  Reform 

7.  Economic  Phenomena  Analogous  to  Rent 


1.  Introductory 

The  term  Rent  is  employed  by  economists  in  a  special  and  tech- 
nical sense  with  reference  primarily  to  the  productivity  of  land.  Rent 
is  the  return  for  the  use  of  land  under  conditions  which  give  it  superior 
productiveness. 

As  has  been  explained,  the  amount  of  this  return  is  a  question 
involving  the  application  of  the  theory  of  value,  and  it  depends,  as 
always  in  a  value  problem,  upon  demand  and  supply. 

Questions 

1.  Is  the  demand  for  land  a  case  of  derived  demand?  elastic 
demand  ?  composite  demand  ?  joint  demand  ?  Show  why  you  answer 
as  you  do  in  each  case. 

2.  Does  the  elasticity  of  the  demand  for  land  de])end  on  the  use 
to  which  the  land  is  to  be  put?  Illustrate  your  answer  by  means  of 
examples. 

3.  In  what  ways  is  the  supply  of  land  influenced  by  each  of  the 
following  forces:  (a)  physical  limitation;  (b)  social  limitation,  either 
formal  or  informal;    (c)  cost  of  production? 

4.  Is  there  greater  scarcity  of  good  sites  for  office-buildings  than 
of  good  corn-land  ?     Why  ? 

5.  Could  you  "make"  land  of  a  character  suitable  for  (a)  building 
sites  ?     {b)  quarries  ? 

2.  The  Differential  Return  (without  necessary  reference  to  any 
particular  system  of  ownership) 

Let  us  assume  a  given  demand  for  the  services  of  land.  It  is 
then  to  be  noticed  that  on  the  supply  side  conditions  arise  in  actual 
practice  which  give  rise  to  a  "differential  return,"  according  to  the 
qualities  of  ihe  land,  and  the  way  it  is  used.     It  is  important  to  notice 


94 


OUTLINES   OF  ECONOMICS 


that  this  "differential  return"  would  exist  under  any  organization  of 
society. 

Quality  of  land  is  by  no  means  a  matter  of  fertility  alone.  In 
the  case  of  agricultural  land,  for  example,  the  superiority  of  one  piece 
over  another  consists  in  its  capacity  to  yield  a  given  product  at  lower 
cost;  and  since  the  cost  of  transportation  to  market  forms  part  of  the 
cost  of  production,  properly  speaking,  accessibility  of  location  is  no 
less  important  than  fertility  of  soil  in  determining  the  rent  of  agri- 
cultural land.  Hereafter  such  land  will  be  regarded  as  good  in  pro- 
portion as  it  combines  fertility  with  favorable  situation.  It  need 
scarcely  be  pointed  out  that  in  the  case  of  building  sites  location  is 
usually  the  only  element  of  practical  significance. 

Questions 

I  {to  illustrate  agricultural  rent,  assuming  extensive  cultivation 
alone).  Suppose  that  in  a  certain  self-sulBcing  community  there  are 
three  plots  of  land.  A,  B,  and  C,  of  different  grades  such  that  the 
ecjuivalent  of  loo  days'  labor  of  a  man  with  appropriate  tools  pro- 
duces on  A  200  bushels  of  wheat;  on  B,  150;  and  on  C,  100.  That 
is,  a  bushel  of  wheat  costs  on  A  half  a  day  of  labor  and  capital  service; 
on  B,  two-thirds  of  a  day;  on  C,  i  day.  Obviously  A  will  be  culti- 
vated first.  B  will  not  be  cultivated  until  the  demand  for  wheat 
warrants  a  labor  and  capital  cost  of  two-thirds  of  a  day  per  bushel, 
and  C  will  be  cultivated  only  when  the  demand  warrants  a  cost  of 
I  day  per  bushel.  Assuming  that  the  product  of  each  piece  of  land 
is  limited  to  the  amount  specified  above,  make  out  a  table  such  as 
is  indicated  below,  showing,  for  each  plot  of  land  and  under  each  of 
the  given  conditions,  the  yield  in  bushels  and  the  rental  in  bushels 
which  would  be  paid. 


When  Demand  for  Wheat  Warrants 

Land  A 

Land  B 

Land  C 

Production  at  a  Cost  of 

Yield 

Rental 

Yield 

Rental 

Yield 

Rental 

it  day  per  bushel 

§  day  per  bushel 

I  day  per  bushel 

2.  Explain,  step  by  step,  the  causes  of  rent  under  conditions  of 
extensive  cultivation  by  showing  why,  given  the  assumptions  of  the 
previous  problem,  (a)  the  price  of  wheat  rises;  (b)  poorer  land  is 
resorted  to;  (c)  the  better  land  commands  a  rental;  (d)  the  worst 
land  in  use  does  not  command  a  rental. 


THE   DISTRIBUTIVE    PROCESS  95 

3  (to  illustrate  agricultural  rent,  assuming  intensive  cultivation  alone). 
Suppose  that  land  A,  as  described  in  the  preceding  problems,  is  the 
only  land  available.  If  the  application  of  more  than  100  days'  labor 
on  this  land  causes  diminishing  returns  to  appear,  not  more  than 
200  bushels  can  be  raised  at  the  initial  cost  per  bushel  of  a  half-day's 
use  of  labor  and  capital.  Using  the  same  figures  as  in  Question  i, 
assume  demand  to  increase  so  that  a  total  of  first  100,  then  200, 
and  then  300  days'  labor  is  applied  with  a  resultant  product  of  first 
200,  then  350,  and  then  450  bushels.  Work  out  the  rent  in  each 
case.  Bear  in  mind  that  value  in  such  cases  must  cover  the  cost  of 
the  marginal,  or  most  costly,  unit  of  the  product.  The  total  value 
of  the  crop  will  therefore  exceed  the  total  cost  of  the  crop. 

4.  In  actual  practice,  if  different  grades  of  land  are  simultaneously 
under  cultivation,  will  cultivation  be  intensive  (a)  on  any  of  the  land  ? 
(b)  on  all  the  land  ? 

5.  Formulate  a  statement  explaining  the  amount  of  rent  which  a 
given  piece  of  land  will  command  as  a  result  of  both  intensive  culti- 
vation and  differences  in  quality  of  land. 

6.  "Assuming  demand,  the  cause  of  rent  is  the  inadequacy  of  the 
better  grades  of  land.  This  inadequacy  depends  upon  (o)  the  physical 
scarcity  of  the  better  grades  of  land,  and  {b)  the  law  of  diminishing 
returns."     Do  you  agree? 

7.  If  all  land  were  equally  good,  could  there  be  rent  ? 

8.  Could  the  worst  land  under  cultivation  yield  rent  ? 

9.  Does  rent  inevitably  exist  if  at  any  one  time  lands  of  different 
fertility  are  cultivated  ? 

10.  Could  land  command  rent  while  other  land  equally  good 
remained  unused  ? 

11.  Can  there  be  no-rent  land?  Can  there  be  no  no-rent  land? 
Under  what  conditions  ? 

12.  What  would  be  the  ei'fect  upon  rents  if  new  land  were  dis- 
covered?   if  a  railroad  opened  up  a  new  country? 

13.  If  the  state  owned  all  the  land  would  there  be  any  rent? 
Why? 

14.  "The  doctrine  of  rent  breaks  down  because  the  doctrine  of 
marginal  cost  is  absurd.  Suppose  that  the  marginal  cost  of  wheat 
to  a  certain  farmer  is  70  cents  per  bushel  and  that  wheat  is  selling 
for  70  cents.  If  the  average  cost  to  this  farmer  is  50  cents,  he  will 
be  under  strong  incentive  to  increase  his  output.  Thus  marginal 
cost  does  not  operate  so  powerfully  as  average  cost  in  price  determi- 
nation and  thus  the  rent  theory  breaks  down."      Why  or  why  not? 

15.  Is  the  rental  of  building-sites  deterniined  by  the  same  ])rin- 
ciples  which  apj^ly  to  agricultural  land  ?  If  so,  what  use  of  building- 
sites  corresponds  to  intensive  cult  i\  at  ion  ? 


96  OUTLINES   OF   ECONOMICS 

i6.  Two  isolated  islands,  A  and  B,  are  connected  by  a  bridge. 
No  foreign  traffic  exists.  A  can  be  used  for  cultivation  alone,  B  for 
habitation  alone,  (a)  Can  any  land  on  A  have  rent  ?  Can  any  land 
on  B  ?     (b)  Can  all  land  on  A  have  rent  ?    Can  all  land  on  B  ? 

3.  The  Relation  of  Economic  Rent  to  Contract  Rent  under 
A  Regime  of  Private  Property 

For  want  of  a  better  term  let  us  call  the  "scientifically  determined 
differential"  discussed  in  the  preceding  section  economic  rent.  Now, 
in  this  present  society  of  ours,  the  actual  payment  for  the  use  of  land 
(sometimes  called  commercial  or  contract  rent)  may  be  widely  different 
from  the  economic  rent,  owing  to  imperfect  competition,  custom, 
long-term  contracts,  etc. 

Questions 

1.  Assuming  perfect  competition,  establish  that  (a)  the  landlord 
cannot  exact  more  than  the  economic  rent  from  a  tenant;  (b)  the 
tenant  cannot  secure  the  use  of  land  without  paying  as  much  as  the 
economic  rent. 

2.  Can  you  cite  cases  where  commercial  rent  exceeds  economic 
rent  ?  cases  where  it  is  less  than  economic  rent  ?  Try  to  explain  the 
discrepancy  in  each  case. 

3.  Does  contract  rent  tend  to  equal  economic  rent  under  the 
share  system  ? 

4.  What  determines  the  amount  which  would  be  paid  for  a  year's 
use  of  (a)  timber  lands?  (b)  ore-bearing  lands?  (c)  city  lots?  (d) 
factory  sites  ?  (e)  land  controlling  sources  of  water  power  ?  (/)  fishing 
waters  ? 

5.  Is  the  "rent"  of  a  down-town  New  York  office  rent  in  the 
economic  sense  of  the  term  ? 

6.  How  much  could  be  exacted  for  the  use  of  land  if  it  afforded 
an  absolute  monopoly  of  the  sources  of  some  rare  mineral  ? 

7.  What  is  the  reason  for  the  assessment  of  betterments  when  a 
street  is  improved  ? 

8.  Are  we  to  term  the  income  yielded  by  permanent  improvements 
on  land  rent,  interest,  or  profits  ? 

9.  Are  tenants  likely  to  make  permanent  improvements  upon 
rented  land  ?     Why  ? 

10.  How  would  rents  in  this  country  be  affected  by  inventions 
radically  impro\'ing,  as  regards  efficiency  and  cheapness,  (a)  harvest- 
ing machinery  ?  (b)  artificial  fertilizers  ?  (c)  refrigerator  freight  cars  ? 
(d)  automobiles  ? 

11.  It  is  said  that  the  development  of  the  bicycle  affected  sub- 
urban site-rents.     Explain. 


THE  DISTRIBUTR'E   PROCESS  97 

12.  Will  agricultural  rents  increase  in  the  United  States?  Will 
urban  rents  increase  ?  Why  ?  Would  your  answer  be  the  same  for 
all  sections  of  the  country  ? 

13.  Why  did  the  land-owning  classes  in  England  oppose  the  repeal 
of  the  Corn  Laws,  which  levied  a  duty  on  imported  grain  ? 

14.  A  50-acre  farm  has  a  normal  yield  of  20  bushels  of  wheat  per 
acre,  and  the  normal  price  of  wheat  is  one  dollar  per  bushel.  The 
farmer's  outlay  for  labor,  use  of  tools,  etc.,  is  $300  annually.  His 
own  labor  is  worth  $500.  (a)  What  is  the  probable  marginal  cost 
of  wheat  on  this  farm  ?  (b)  What  is  the  economic  rent  ?  (c)  If,  because 
of  a  temporary  corner,  wheat  were  to  sell  for  $1 .  50  for  a  few  days, 
would  that  affect  (a)  the  marginal  cost  ?  (b)  the  economic  rent  ?  (c) 
the  contract  rent  ? 

15.  "The  price  of  land  is  ordinarily  fixed  by  capitalizing  the  rental 
— i.e.,  a  person  \nll  pay  for  a  piece  of  land  an  amount  which,  if  it 
were  used  for  another  investment  equally  secure  and  promising, 
would  yield  an  income  equal  to  the  rent  of  the  land."  Is  this  an 
adequate  statement  ?  Is  present  rental  or  expected,  future  rental, 
capitalized  ? 

16.  "We  all  know  perfectly  well  that  much  land  which  is  not  yet 
used  will  sell  for  a  good  figure.  Take,  for  example,  building  land 
at  the  outskirts  of  the  building  section.  The  capitalization  of  rental 
in  this  case  would  be  zero,  yet  the  land  wall  bring  a  good  price." 
Comment. 

17.  A  certain  lot  of  city  land  is  leased  for  99  years  at  $10,000  a 
year.  If  taxes  on  the  land  amount  to  $2,500  per  year,  what  ])rice 
would  the  land  sell  for,  assuming  that  the  prevalent  rate  of  net  return 
from  similar  investments  is  (a)  4  per  cent  ?  (b)  5  per  cent  ?  (c)  6 
per  cent  ? 

4.  Rent  and  Cost  of  Production 

Questions 

1.  From  the  standpoint  of  a  tenant,  is  the  rent  he  pays  one  of 
his  e.xpenses  of  production  ? 

2.  Suppose  that  the  tenant  should  ha\e  liis  rents  remitted  by  a 
benevolent  landlord.  Would  the  tenant  increase  his  output  ?  Would 
he  sell  this  output  at  a  lower  price  per  bushel  ?  Does  the  payment 
of  rent  affect  the  price  of  the  products  of  rented  land  ? 

3.  Taking  the  term  cost  of  production  to  mean  marginal  cost,  or 
the  cost  which  determines  the  sui)ply-price  of  the  commodity  pro- 
duced, is  rent  determined  by  cost  of  production  or  is  cost  of  pro- 
duction determined  by  rent  in  the  sim]')le  case  of  one  agricultural 
commodity,  as  wheat,  raised  on  different  grades  of  land  ? 


98  OUTLINES   OF  ECONOMICS 

4.  If  the  owners  of  wheat  lands  mentioned  in  the  last  problem 
refused  to  be  paid  for  the  use  of  their  lands,  would  the  cost  of  produc- 
tion of  wheat  be  changed  ? 

5.  In  fact,  land  is  used  for  many  purposes.  Does  the  fact  that 
buildings  are  erected  on  better  lands  than  are  now  used  for  growing 
wheat  cause  the  marginal  cost  of  wheat  to  be  greater  than  it  would 
be  otherwise  ? 

6.  Is  rent  a  result  of  production,  a  condition  preceding  production, 
or  an  outlay  in  course  of  production,  (a)  in  the  case  of  newly  reclaimed 
land  wanted  for  only  one  use  ?  (b)  in  the  case  of  land  which  has 
proved  its  fitness  for  many  purposes  ? 

7.  A  grocer  establishes  his  shop  on  a  corner  site  in  a  fashionable 
residence  quarter  of  a  large  city.  Should  you  expect  his  rental  to 
be  high?  Why?  Should  you  expect  him  to  charge  high  prices? 
Why  ?     Why  should  he  choose  such  a  location  ? 

8.  The  small  shopkeeper  on  the  outskirts  of  a  large  city  frequently 
says  that  he  can  sell  his  goods  cheaper  than  the  big  stores  in  the 
center  of  the  city  because  his  rent  is  low.  If  that  is  so  why  do  not 
the  large  stores  move  to  a  place  where  their  rents  would  be  lower? 

5.  Rent  in  Relation  to  Taxation 

Questions 

1.  Suppose  a  tax,  equal  to  the  economic  rent,  levied  on  every 
piece  of  land.  Assuming  perfect  competition,  and  assuming  that  the 
tenant  leaves  the  land  in  as  good  condition  as  he  found  it,  could 
a  landlord  force  his  tenant  to  pay  the  tax,  wholly  or  in  part  ?  What 
would  be  the  effect  of  the  tax  upon  agricultural  prices  ? 

2.  How  should  you  modify  your  answers  to  the  preceding  question 
if  the  tax  were  less  than  the  economic  rent,  but  proportional  to  it  ? 

3.  In  actual  practice  who  would  be  likely  to  bear  the  burden  of 
the  tax  in  each  of  the  above  cases  ? 

4.  How  would  the  price  of  land  be  affected  in  each  of  the  above 
cases  ?  Would  a  man  who  bought  the  land  after  the  tax  had  been 
imposed  bear  any  of  the  burden  of  this  taxation  ? 

5.  How  would  a  tax  of  10  cents  per  bushel  on  wheat  affect  rents  ? 

6.  Rent  and  Social  Reform 

Land  is  characteristically  a  free  gift  of  nature,  and.  many  of  the 
advantages  of  owning  land  are  the  results  of  natural  or  social  condi- 
tions which  the  owner  has  done  nothing  to  bring  about.  Hence  the 
income  of  the  landlord  has  been  called  the  tmcarncd  increment,  and 
social  reformers  have  desired  to  abolish  it. 


THE   DISTRIBUTIVE   PROCESS  99 

Questions 

1.  Give  a  striking  case  of  the  unearned  increment  from  your  own 
experience. 

2.  A  corporation  buys  a  tract  of  waste  land  and  proceeds  to  con- 
struct a  large  industrial  plant,  and  to  develop  transportation  facilities, 
lay  out  streets,  and  otherwise  provide  for  the  building  up  of  a  mill 
town.     Do  rents  in  such  a  town  constitute  an  unearned  increment  ? 

3.  Did  individuals  or  society  at  large  create  the  conditions  which 
cause  rent  to  emerge  ? 

4.  Do  you  consider  that  the  real  justification  of  private  property 
in  land  is  the  fact  that  the  acquisition  of  the  land  has  involved  effort 
and  sacrifice,  or  the  fact  that  land  held  as  private  property  is  more 
likely  to  be  utilized  efficiently  for  production? 

5.  Would  the  amount  of  available  land  be  changed  if  private 
property  in  land  were  abandoned  ? 

6.  What  advantages  to  society  result  from  the  private  ownership 
of  land  ? 

7.  If  land  nationaUzation  is  to  be  resorted  to  should  you  favor 
accompHshing  it  by  the  method  of  compensation  or  by  that  of  con- 
fiscation ?     Why  ? 

.  8.  Is  it  right  to  buy  stolen  property?  Since  land  is  Nature's 
gift,  has  one  a  better  right  than  another  to  it  ?  Could  we  justify 
confiscation  by  this  line  of  reasoning  ? 

9.  Can  it  be  said  that  at  present  the  rent  surplus  is  practically 
to  be  regarded  as  interest  on  the  money  spent  in  the  purchase  of  the 
land?  Does  that  justify  us  in  continuing  the  payment  of  rent  to 
individual  landowners  ? 

10.  Should  you  regard  it  as  confiscation  to  tax  away  all  future 
unearned  increment  ?     Could  it  be  done  ? 

11.  Is  land-owning  always  profitable?  Do  land- values  always 
rise? 

12.  Would  a  tax  on  rent,  by  jeopardizing  the  advantages  of  land- 
owning, prevent  the  improvement  of  land  ?  Do  you  know  of  cases 
in  which  persons  have  erected  buildings  or  made  other  improve- 
ments on  land  they  did  not  own  ? 

7.  Economic  Phenomena  Analogous  to  Rent 

The  principles  of  rent  have  often  been  extended  to  explain  by 
analogy  economic  phenomena  other  than  the  diflerential  return  to 
land.  Thus  the  excess  of  the  total  utiHty  of  a  commodity  over  its 
total  cost  is  called  consumers'  rent;  the  excess  of  interest  received 
for  loans  of  capital  above  the  cost  of  saving  which  lenders  have 
incurred  is  called  savers'  rent,  etc. 


lOO  OUTLINES   OF  ECONOMICS 

x'Vgain,  the  higher  earnings  of  specially  skilled  workmen  or  highly 
efficient  entrepreneurs  are  often  likened  to  rent. 

A  particularly  interesting  analogy  is  presented  by  the  case  of 
capital  goods  which  cannot  readily  be  duplicated  or  increased  in 
amount,  and  which  thus  afford  at  least  temporarily  a  superior  and 
limited  productive  service.  The  return  for  such  services  has  been 
called  quasi-rent  and  constitutes  the  borderland  between  rent  and 
interest. 


III.  Wages  and  Trade  Unionism 

1.  The  Demand  for  Labor 

2.  The  Supply  of  Labor 

3.  Some  Practical  Applications  of  the  Principle  of  Demand  and 
Supply  to  the  Subject  of  Wages 

4.  The  Specific  Productivity  Theory  of  Wages 

5.  Trade  Unionism 

The  problem  here  is  the  evaluation  of  the  services  of  labor. 

Wages  in  a  specific  case  are  the  payment  given  for  labor  service 
rendered.  Fundamentally,  wages  are  economic  goods — commodities 
and  services  (real  wages).  Practically,  labor  is  paid  for  in  money 
(money-wages  or  nominal  wages)  which  gives  the  laborer  command 
over  these  goods. 

Our  discussion  will  center  on  the  application  of  principles  of 
demand  and  supply  to  the  problem  of  the  value  of  labor. 

I.  The  Demand  for  Labor 

Questions 

1.  Is  the  demand  for  labor  a  derived  demand?  a  composite 
demand  ?  a  joint  demand  ?  an  elastic  demand  ?  a  case  where  the  prin- 
ciple of  substitution  has  wide  play  ?     Prove  your  answer  in  each  case. 

2.  Is  the  demand  for  the  labor  of  footmen  direct  or  derived?  Is 
it  a  joint  demand  ? 

3.  In  determining  the  wage  of  a  particular  man,  are  we  concerned 
with  the  demand  for  labor  in  general,  or  with  the  demand  for  labor 
of  the  kinds  he  can  furnish,  or  with  the  demand  for  labor  in  his  trade  ? 

4.  "Since  labor  is  in  demand  simply  as  a  means  to  the  attainment 
of  the  utilities  it  serves  to  produce,  the  maximum  price  which  will 
be  paid  for  labor  can  never  normally  exceed  the  normal  price  of  the 


THE  DISTRIBUTIVE   PROCESS  loi 

product.  Whenever  land,  tools,  etc.,  are  necessary  in  production 
the  maximum  price  which  could  be  paid  for  labor  will  be  less  than 
the  price  of  the  product  by  the  amount  which  must  be  spent  for  the 
use  of  the  other  productive  factors.  And  whenever  a  substitute  for 
labor  (e.g.,  machinery)  is  available,  the  demand  for  labor  is  in  so  far 
reduced."     Do  you  agree? 

5.  Are  these  acts  necessarily  offers  of  employment  to  labor: 
(a)  an  offer  to  purchase  a  watch;  {b)  an  offer  to  let  a  contract  to 
build  a  $100,000  house;    (c)  investment  of  $1,000  in  a  savings  bank  ? 

6.  Does  a  demand  for  antiques,  paintings  by  old  masters,  etc., 
affect  the  general  demand  for  labor  ? 

7.  Is  the  demand  for  commodities  already  manufactured  a  demand 
for  labor  ? 

8.  If  it  takes  20  days  to  make  an  automobile,  does  an  order  for 
immediate  delivery  of  an  automobile  create  a  demand  for  labor? 

9.  Does  the  manufacture  of  shoes  create  a  demand  for  the  employ- 
ment of  labor  in  other  industries  ? 

10.  Will  the  demand  for  labor  be  greater  in  a  sparsely  settled 
country  or  in  a  densely  settled  country,  assuming  rich  natural  resources 
in  each  case  ? 

11.  Speaking  generally,  does  the  laborer  gain  or  lose  by  working 
under  conditions  of  abundance  of  land  and  capital  ? 

12.  If  a  factory  town  is  destroyed  by  fire  will  the  demand  for 
labor  throughout  the  country  at  large  increase  or  decrease  ? 

13.  Why  should  not  the  farmer  who  uses  good  land  pay  higher 
wages  than  the  farmer  on  poorer  land,  instead  of  paying  rent  ? 

2.  The  Supply  of  Labor 

The  value  of  commodities  in  general  has  been  shown  to  be  related 
to  conditions  of  supply — physical  limitation,  cost  of  j'lroduction, 
formal  and  informal  social  control,  nn)nopoly,  perishability,  etc. 
Now,  in  attempting  to  discover  how  labor-ser\dce  is  evaluated,  we 
must  inquire  whether  this  particular  commodity  is  subject  to  the 
same  laws  of  sup])ly  as  the  others.  The  inquiry  is  comy^licatcd  by 
the  fact  that  supjjly  of  lal)or  is  largely  a  matter  of  the  number  and 
abilities  of  the  persons  who  work.  But  it  is  not  permissible  to  regard 
persons  as  laborers  only,  with  no  interest  in  life  except  the  rate  of 
wages.  These  same  persons  are  consumers,  to  meet  whose  needs 
the  industrial  system  exists.  Their  cai)acities,  their  willingness  to 
work,  their  own  existence,  depend  not  simply  on  the  desire  of  others 
for  their  services  but  also  on  the  desire  to  live  and  the  ideals  of  liv'ing 
which  ha\'e  animated  their  ancestors  and  which  continue  to  animate 
the  workers  themselves. 


I02  OUTLINES   OF  ECONOMICS 

Questions 

1.  Does  every  individual  represent  the  same  amount  of  labor- 
power  ?     Why  ? 

2.  Is  there  at  a  given  moment  any  physical  limitation  of  the 
supply  of  (a)  laborers?  (6)  labor?  What  is  the  nature  of  the 
limitation  ? 

3.  What  relation  exists  between  the  standard  of  living  and  the 
supply  of  (a)  laborers  ?  (b)  labor  ? 

4.  Ordinarily  an  increased  demand  for  a  commodity  which  is  not 
absolutely  limited  in  amount  will  result  in  an  increased  supply.  To 
what  extent  would  this  be  true  of  laborers  ?  of  labor  ? 

5.  Does  cost  of  production  in  the  case  of  labor  mean  (a)  mere 
subsistence  of  the  particular  laborer?  (b)  mere  subsistence  plus  a 
return  for  expense  of  training  ?  (c)  sufficient  return  to  enable  a  laborer 
to  rear  a  family  ?     If  the  last,  how  large  a  family  ? 

6.  Does  what  it  "cost  to  produce"  a  given  laborer  determine 
his  wage  ?  Does  it  have  any  bearing  on  the  rate  of  wages  in  the 
future  ? 

7.  Does  the  amount  of  labor  which  will  be  supplied  depend  to  any 
extent  upon  the  rate  of  wages  ?  If  so,  does  the  rate  of  wages  influence 
the  number  of  persons  able  to  work,  or  their  willingness  to  work, 
or  both  ? 

8.  To  what  degrees  and  in  what  ways  is  the  supply  of  labor 
service  affected  by  (a)  perishability  ?  (b)  difficulty  of  transportation  ? 

9.  "The  owner  of  labor  cannot  be  separated  from  the  commodity 
he  sells.  He  must  deliver  it  in  person.  This  makes  a  difference 
between  the  supply  of  labor  and  the  supply  of  other  goods."     How? 

10.  Cite  cases  where  formal  social  limitation  affects  the  supply  of 
labor.     Cite  cases  where  informal  social  limitation  affects  it. 

11.  Does  legal  limitation  of  the  hours  of  labor  affect  the  supply 
of  labor?     May  it  in  some  cases  actually  increase  labor  supply? 

12.  Cite  cases  of  monopolistic  limitation  of  the  supply  of  labor. 

13.  Do  you  think  that  immigration  increases  the  supply  of  labor  ? 


3.  Some  Practical  Applications  of  the  Principle  of  Demand 
AND  Supply  to  the  Subject  of  Wages 

Questions 

I.  It  has  been  said  that  an  increase  in  the  number  of  laborers 
cannot  depress  general  wages  because  this  increase  implies  a  corre- 
sponding increase  in  consumption  and  in  demand  for  labor.  Is 
anything  overlooked  in  this  argument  ? 


THE   D1STR1BUT1\E    PROCESS  103 

2.  How  would  a  sudden  introduction  of  machinery  affect  wages? 

3.  Why  are  the  wages  of  skilled  managers  greater  than  those  of 
street  cleaners  ? 

4.  Why  are  the  wages  of  servants  higher  in  the  United  States 
than  in  England  for  the  same  grade  of  service? 

5.  What  should  you  have  to  pay  a  cook  in  an  Alaskan  gold- 
mining  camp  ? 

6.  Laborers  on  railway  embankments  in  India  were  paid,  accord- 
ing to  Mr.  Brassey,  from  9  to  12  cents  a  day,  but  in  England  from 
75  to  87  cents  a  day;  yet  the  expense  of  building  a  mile  of  rail- 
way was  about  the  same  in  the  two  places.  How  do  you  account 
for  this  ? 

7.  Does  unskilled  labor  suffer  more  or  less  than  skilled  labor  by 
forced  changes  to  new  employment  ? 

8.  Can  laborers,  by  strikes  and  combinations,  raise  their  wages 
to  a  point  where  nothing  is  left  for  capital  and  interest  ?     Why  not  ? 

9.  Differences  of  wages  have  been  classified  as  follows: 
(r)  Differences  of  Wages  for  Different  Employments: 

(i)    Differences  tending  to  equalize  the  advantages  of  all  occupa- 
tions by  making  reward  proportionate  to  effort  and  sacrifice, 
(ii)  Differences  arising  from  the  more  or  less  limited  number  of 
persons  whose  aptitudes,  inborn  or  acquired,  permit  them 
adequately  to  perform  a  given  task. 
(2)  Differences  of  Wages  for  Different  Persons  in  a  Given  Employ- 
ment: 

Differences  corresponding  to  differences  of  efficiency. 
Explain  wherein  these  various  differences  are  due  to  conditions  of 
demand  and  wherein  they  are  due  to  conditions  of  supply. 

10.  Give  examples  of  cases  in  which  arduous  and  unpleasant  work 
commands  a  high  compensating  wage.  Give  examples  of  other  cases 
where  low  wages  and  hard  conditions  of  work  go  together.  Can  you 
explain  the  difference  between  the  two  groups  of  cases  which  results 
in  this  difference  of  remuneration? 

11.  Is  the  labor  market  a  single,  com[)etitive  market?  Does  the 
illiterate  immigrant  compete  for  work  with  the  lawyer? 

12.  Show  by  means  of  examples  how  differences  of  wealth,  educa- 
tion, social  connection,  inborn  ability,  etc.,  may  separate  the  labor 
market  into  non-competing  groups. 

13.  In  the  United  States  are  the  economic  barriers  between  social 
classes  effectual  barriers  ? 

14.  "To  secure  the  ])ractical  results  of  free  competition  as  between 
employments  it  is  not  necessary  that  every  person  in  any  one  emfiloy- 
ment  shall  be  free  to  change  to  another.  If  a  few  are  mobile  their 
shifting  will  ordinarily  sufTice  to  adjust  the  supply  of  labor  to  the 


I04  OUTLINES   OF   ECONOMICS 

demand    in    each    employment."     Explain    this    statement.     What 
bearing  has  it  on  the  principle  of  non-competing  groups? 

15.  "Competition  laetween  apparently  non-competing  groups 
is  in  some  cases  made  operative  by  an  application  of  the  principle 
of  substitution.  It  may  be  possible,  e.g.,  to  replace  skilled  laborers 
by  unskilled  laborers  working  with  improved  machinery.  The  gap 
which  exists  between  the  two  grades  of  labor  is  here  bridged  by 
substituting  capital  for  superior  skill  of  workmen."  Give  examples 
of  indirect  competition  of  this  sort. 

16.  What  effect  on  wages  should  you  expect  as  a  result  of  better 
provisions  for  free  technical  education  ? 

17.  Are  the  farmer,  the  miller,  and  the  baker  members  of  the 
same  group  of  laborers,  or  of  competing  groups,  or  of  non-competing 
groups  ? 

18.  Does  the  principle  of  non-competing  groups  help  to  account 
for  differences  between  men's  wages  and  women's  wages? 

19.  In  a  certain  office  a  man  and  a  woman  are  sitting  side  by  side 
doing  the  same  work.  The  woman  is,  if  anything,  more  efficient 
than  the  man.  Her  wage  is  considerably  lower.  Explain  how  this 
can  be. 

20.  What  reasons  can  you  offer  to  explain  why  the  wages  of 
women  are  generally  lower  than  the  wages  of  men  ? 

21.  If  laws  were  passed  requiring  that  women  should  have  the 
same  wages  as  men  wherever  they  were  employed  in  similar  work 
would  men  or  women  derive  the  greater  benefit  from  the  rule  ? 

22.  Allowing  for  all  the  influences  thus  far  considered,  what  con- 
ditions fix  the  maximum  and  minimum  limits  to  the  rate  of  wages 
in  a  particular  case  ? 

23.  What  determines  the  wage  actually  paid,  within  the  limits 
above  mentioned  ? 

4.  The  Specific  Productivity  Theory  of  Wages 

The  value  of  labor  appears  to  depend  on  the  efficacy  of  labor. 
The  efficacy  of  labor  in  turn  depends  on  the  manner  in  which  labor 
is  employed.  Under  certain  conditions  of  demand  and  supply,  labor 
may  be  used  in  conjunction  with  land  and  capital  so  inadequate  that 
the  product  of  the  industry  is  restricted  by  the  intensive  operation 
of  the  principle  of  diminishing  returns.  In  such  cases  where  the 
labor  force  is  disproportionately  large,  the  product  per  laborer  will 
be  small. 

This  suggests  the  principle  that  individual  wages  for  a  given  grade 
of  labor  will  not  exceed  the  amount  which  is  added  to  the  product 
by  the  effort  of  the  marginal  laborer;    that  if  the  supply  of  labor  is 


THE   DISTRIBUTIVE   PROCESS  105 

not  excessive,  and  if  laborers  are  able  to  exact  favorable  terms  of 
employment  on  account  of  competition  among  persons  who  wish  to 
hire  them,  wages  will  not  fall  substantially  below  the  amount  of 
the  product  added  by  the  marginal  laborer.  The  term  "marginal 
laborer"  means  here,  as  most  commonly,  not  the  least  competent 
laborer  but  the  laborer  of  normal  capacity  employed  under  the  con- 
ditions least  favorable  for  his  productiveness. 

The  theory  that  wages  correspond  to  the  marginal  productivity 
of  labor  (i.e.,  to  the  productivity  of  those  laborers  who  are  least 
effectively  employed)  is  known  as  the  specific  productivity  theory 
of  wages.  Its  adequacy  to  explain  actual  wages  is  disputed.  At 
least  it  affords  an  interesting  suggestion  for  the  analysis  of  the  demand 
for  labor. 

Questions 

1.  Could  there  be  any  production  without  labor?  How  is  it 
possible  to  estimate  the  share  of  the  product  which  labor,  as  dis- 
tinguished from  capital  and  land,  produces  ? 

2.  Could  an  employer  ascertain  how  much  of  the  total  product 
depends  on  the  work  of  any  one  laborer  ? 

3.  Why  should  laborers  in  general  consent  to  the  remuneration 
which  conforms  to  the  product  of  the  marginal  laborer — i.e.,  of  the 
laborer  employed  under  the  most  unfavorable  circumstances  ?  Could 
they  force  the  employer  to  pay  more  ? 

4.  Can  the  laborers  control  the  conditions  which  make  the  mar- 
ginal productivity  of  labor  small  ? 

5.  Suppose  an  increase  in  the  number  of  persons  seeking  employ- 
ment as  laborers  without  any  increase  in  the  number  of  consumers 
of  the  products  of  labor.  What  will  be  the  effect  on  wages  ?  Will 
this  effect  be  due  to  change  in  the  marginal  utility  of  the  product  or 
to  change  in  the  marginal  productivity  of  labor? 

6.  Explain,  according  to  the  specific  productivity  theory,  how, 
other  factors  remaining  unchanged,  wages  would  be  affected  by  (a) 
increase  in  the  number  of  laborers;  (b)  decreased  demand  for  the 
product.  Do  you  arrive  at  the  same  conclusion  if  you  answer  accord- 
ing to  the  demand-and-supply  theory  ? 

7.  Does  the  specific  productivity  theory  of  labor  take  adequate 
account  of  supply  of  labor?     How?     Of  demand  for  labor?     How? 

8.  Do  differences  of  wages  as  b^'tween  occupations  correspond 
to  differences  in  the  marginal  productivity  of  labor? 


io6  OUTLINES   OF  ECONOMICS 

5.  Trade  Unionism 

a)  Causes  of  Trade  Unionism 

b)  Trade  Union  'Organization  and  Demands 

c)  Trade  Union  Theory 

d)  Trade  Union  Policies  and  Methods 

e)  The  Social  Problem  of  Unionism 

Trade  unions,  like  railroads  and  trusts,  are  an  important  factor 
in  the  productive  organization  of  industry.  The  unions  have  devel- 
oped into  a  complex  organic  network  which  tends  to  parallel  the 
pecuniary  and  political  organization  of  society  and  influences  eventu- 
ally the  productive  process. 

Trade  unions  are  discussed  in  this  outline  under  the  distributive 
process  because  they  are  organized  to  secure,  primarily,  higher  wages, 
shorter  hours,  and  better  conditions  of  employment  generally  for  their 
members.  They  seek  these  ends  by  a  great  variety  of  means.  Promi- 
nent among  these  means  are:  (i)  the  estabUshment  of  a  standard  or 
uniform  rate  of  wages  for  each  kind  of  work;  (2)  the  fixing  of  a  normal 
or  uniform  working  day  or  week;  (3)  the  establishment  of  standard 
or  uniform  methods  of  work  and  processes  of  production;  (4)  limita- 
tion and  control  of  the  speed  and  output  of  the  workers;  (5)  entrance 
restrictions  and  apprenticeship  regulations;  (6)  arbitration  and  con- 
ciHation;  (7)  strikes  and  boycotts;  (8)  trade  union  insurance;  and 
(9)  labor  legislation. 

The  activity  of  trade  unions  has  of  late  greatly  stimulated  the 
organization  of  employers'  associations.  Some  understanding  of 
these  associations  is  essential  to  an  estimate  of  the  significance  of 
unionism. 

a)  Causes  of  Trade  Unionism 

Questions 

1.  How  do  the  economic  functions,  status,  and  social  environment 
of  the  wage-workers  and  the  employers  differ  essentially  ? 

2.  What  is  it  that  has  caused  these  differences  and  what  was  their 
historical  origin? 

3.  Do  such  differences  create  diverse  notions  on  the  part  of  workers 
and  employers  in  regard  to  justice,  rights,  and  importance  of  economic 
functions  ? 

4.  If  you  were  a  wage-worker  should  you  feel  that  your  interests 
and  those  of  your  employer  were  essentially  opposed  in  any  vital 
matters  ? 

5.  Under  the  conditions  of  capitalistic  production  and  distribu- 


TPIE   DISTRIBUTIVE    PROCESS  107 

tion  what  advantages  has  the  individual  emj)l()yer  over  the  indi- 
vidual worker  in  the  bargaining  which  immediately  fixes  wages  and 
conditions  of  employment? 

6.  Under  modern  conditions  is  the  employer  disposed  or  forced 
to  exercise  to  the  full  extent  any  bargaining  advantage  which  he  may 
have  over  the  workers  ? 

7.  Under  what  circumstances  and  in  what  ways  might  trade 
unions  be  of  distinct  advantage  to  employers  ? 

8.  As  a  matter  of  historical  fact,  when  and  under  what  circum- 
stances were  trade  unions  first  organized  ? 

9.  Are  unions  at  the  present  time  usually  of  spontaneous  origin  ? 
What  circumstances  ordinarily  lead  to  their  organization  ? 

b)  Trade  Union  Organization  and  Demands 

Questions 

1.  What  are  the  essential  differences  between  a  trade  union,  an 
industrial  union,  and  a  labor  union  ?     Name  an  example  of  each 

2.  What  is  a  local  union?  What  is  a  national  or  international 
union  ?  What  are  the  general  relations  between  the  local  and  the 
national  union  ? 

3.  What  are  the  principal  union  officers?  Describe  the  duties 
ordinarily  performed  by  the  secretary,  the  organizer,  the  walking 
delegate  or  business  agent.     What  is  the  sovereign  union  authority  ? 

4.  What  is  the  American  Federation  of  Labor  ?  What  is  its  rela- 
tion to  the  various  local  and  national  unions  ?     What  are  its  policies  ? 

c)  Trade  Union  Theory 

Questions 

1.  Some  unionists  look  with  disfavor  upon  the  individual  who 
"uses  up  more  than  his  share  of  the  demand  for  work."  Examine 
the  practical  validity  of  this  attitude. 

2.  Why  do  unions  attempt  to  establish  the  principle  of  uniformity 
with  respect  to  wage-rates,  hours  of  work,  and  conditions  of  employ- 
ment generally  in  a  trade  ? 

3.  By  what  arguments  do  unions  support  their  attempts  to 
limit  and  control  the  speed  and  output  of  workers  ? 

4.  On  what  grounds  do  unions  attempt  to  limit  the  numbers  and 
control  the  workers  in  a  trade  ? 

5.  Employers  claim  that  unions  attempt  to  prevent  the  introduc- 
tion of  machinery  and  improved  processes.  How  would  union  advo- 
cates justify  such  attempts? 


io8  OUTLINES   OF  ECONOMICS 

6.  Uiiioiiists  claim  that  "high  wages  breed  high  wages."  On 
what  assumption  is  this  claim  based  ?  Are  they  legitimate  assump- 
tions ? 

7.  Can  shorter  hours  and  better  conditions  of  employment  be 
secured  by  all  workers  without  lowering  the  wages  of  some  ? 

8.  When  one  set  of  workers  secures  higher  wages  without  a  corre- 
sponding increase  of  output,  must  someone  else  suffer  ?     If  so,  who  ? 

9.  Will  increase  of  the  efficiency  of  one  group  of  workers  neces- 
sarily increase  their  wages  or  make  it  possible  for  them  to  secure  higher 
wages  ? 

10.  If  the  anthracite  coal  miners  forced  the  mine  owners  to  grant 
a  20  per  cent  increase  in  wages,  who  might  foot  the  bill  ? 

d)  Trade  Union  Policies  and  Methods 

Questions 

1.  What  is  the  practice  of  unions  in  regard  to  the  admission  of 
members?  If  the  union  refuses  to  admit  a  capable  man  does  the 
union  gain  ?     Does  anyone  besides  the  debarred  worker  suffer  ? 

2.  What  is  the  policy  of  unions  in  regard  to  apprenticeship?  Is 
union  apprenticeship  an  effective  method  of  training  skilled  workers  ? 
What  are  the  actual  purposes  of  unions  in  maintaining  the  appr  mtice- 
ship  system? 

3.  Unionists  claim  that  they  favor  industrial  education  "when 
it  does  not  play  into  the  hands  of  the  employers."  Explain  this 
statement. 

4.  Most  unions  demand  and  attempt  to  enforce  the  union  or  closed 
shop;  most  employers  are  bitterly  opposed  to  it.     Why  in  each  case  ? 

5.  Unions  attempt  to  establish  a  minimum  wage  for  each  kind 
of  work  and  a  maximum  number  of  hours  that  a  man  may  work. 
Why,  in  each  case  ? 

6.  In  many  recent  wage  disputes  agreement  was  reached  by  three 
men — a  representative  of  the  employers,  a  representative  of  the  unions, 
and  a  third  chosen  by  these  two.  What  is  this  mode  of  settling 
disputes  called  ? 

7.  Distinguish  arbitration,  conciliation,  and  collective  bargaining, 
and  compare  their  advantages  as  methods  of  regulating  the  conditions 
of  employment. 

S.  What  is  a  trade  agreement  ? 

9.  Are  strikes  as  such  beneficial  to  union  laborers  ?  On  what 
grounds  do  unionists  justify  the  resort  to  strikes  ? 

10.  What  is  a  sympathetic  strike  ? 

11.  In  the  last  telegraphers'  strike  in  Chicago  workers  in  front 


THE   DISTRIBUTIVE   PROCESS  109 

of  the  Western  Union  offices  were  arrested  for  "vagrancy."     What 
strike  duty  were  they  performing  at  the  time  ? 

12.  Unions  are  violently  opposed  to  "scabs"  and  "rats,"  and  such 
persons  frequently  fall  into  the  hands  of  "educational  committees." 
Explain  the  meaning  of  this  statement.  If  you  were  a  unionist 
would  you  have  the  same  attitude  toward  scabs,  and  if  so,  why? 

13.  In  a  labor  controversy  the  employer  sometimes  discharges 
all  the  workers;  what  is  this  action  called?  Has  the  employer  a 
right  so  to  discharge  ? 

14.  What  is  a  blacklist?   What  is  a  "whitelist"  ? 

15.  What  is  the  consensus  of  judicial  decisions  in  regard  to  the 
legahty  of  (a)  sympathetic  strikes  ?  (b)  picketing  ?  (c)  the  boycott  ? 
(d)  blackhsts  ?  Can  you  detect  any  general  principle  underlying  these 
decisions  ? 

16.  What  is  an  injunction?  Why  are  injunctions  especially 
effective  in  suppressing  strikes  ?  What  changes  in  the  law  concerning 
injunctions  are  desired  by  the  unions  ?     Why  ? 

17.  Do  the  unions  act  as  effective  employment  agencies?  Why 
does  a  good  unionist  demand  "union  labor  goods"  ? 

18.  What  are  the  main  methods  used  by  employers'  associations 
in  fighting  unions  ? 

19.  Are  all  employers'  associations  "union  smashers"?  What 
conciliatory  or  constructive  functions  may  such  associations  perform  ? 

20.  If  employers'  associations  continue  to  develop  until  practically 
all  employers  are  associated  in  such  organizations,  will  the  position 
of  the  union  laborer  be  better  than  the  position  of  the  individual 
laborer  was  before  the  days  of  collective  bargaining  ? 

e)  The  Social  Problem  of  Unionism 

Questions 

1.  Samuel  Gompers  believes  that  trade  unions  are  one  of  the 
greatest  educative  forces  in  the  country.  Can  you  find  grounds  for 
this  belief? 

2.  If  all  the  workers  belonged  to  the  unions,  could  the  wages  and 
conditions  of  em[)loyment  be  raised  for  all  by  union  policies  and 
methods  ? 

3.  It  is  said  that  unions  create  an  aristocracy  of  labor.  Is  it 
better  socially  to  have  a  few  workers  highly  paid  and  many  poorly 
paid  than  to  have  all  workers  very  moderately  ])aid  ? 

4.  In  some  trades  the  American  standard  of  li\ing  is  threatened 
by  the  competition  of  immigrants  satisfied  with  low  wages  and  poor 
living  conditions.     Are  the  unions  performing  a  social  service  in 


no  OUTLINES   OF  ECONOMICS 

attempting  to  maintain  the  American  standard  in  these  trades  at 
all  hazards  and  by  all  means  ? 

5.  If  trade  unions  and  employers  are  opposed,  industry  is  likely 
to  be  unproductive  and  the  pubhc  service  interrupted;  if  the  unions 
and  employers  combine,  monopoly  is  likely  to  be  the  outcome.  Is 
there  any  escape  from  this  dilemma  ? 

6.  Would  it  be  well  to  have  a  law  in  the  United  States  similar 
to  that  of  New  Zealand  providing  for  the  compulsory  arbitration  of 
trade  disputes  ?  What  is  the  attitude  of  the  employers  and  unions 
in  this  country  toward  compulsory  arbitration,  and  why? 

7.  Would  it  be  well  to  have  a  law  in  this  country  providing  for  a 
government  investigation  of  all  cases  where  strikes  or  lockouts  are 
threatened  in  public  utihties  and  mines,  and  for  the  pubUcation  of  the 
facts  before  a  strike  or  lockout  should  be  permitted? 


IV.  Interest 


1.  Introductory 

2 .  The  Demand  for  Capital 

3.  The  Supply  of  Capital 

4.  General  Questions  on  Interest 


I.  Introductory 

Interest  is  the  income  from  the  use  of  capital.  It  is  a  part  of  the 
social  dividend  and  represents  the  payment  for  the  services  of  capital. 

Capital  has  been  defined  as  wealth  used  for  further  production 
— i.e.,  as  producers'  goods.  The  brief  discussion  of  capital  which  was 
attempted  under  the  head  of  "The  Productive  Process"  conformed  to 
such  a  definition,  treating  of  social  capital  rsiihexthsin  acquisitive  capital, 
and  dealing  with  the  tangible  forms  of  capital,  or  capital  goods,  rather 
than  with  the  loanable  fund  of  purchasing  power,  which,  expressed 
in  dollars  and  cents,  constitutes  pecuniary  capital  and  conveniently 
measures  the  aggregate  of  tools,  machinery,  material,  or  other  goods 
which  it  is  used  to  buy. 

For  the  analysis  of  the  problem  of  interest  a  more  inclusive  view 
becomes  imperative.  In  the  first  place  there  are  some  forms  of  con- 
sumers' goods  which,  while  not  capital  to  society,  still  are  not  used 
directly  to  satisfy  the  wants  of  the  owner,  but  only  as  a  means  of 
obtaining  an  income — e.g.,  a  dwelling  rented  to  another  person. 
These  goods,  called  acquisitive  capital,  yield  interest,  and  are  not 
in  practical  affairs  sharply  differentiated  from  producers'  goods. 
In  the  second  place  the  saving  and  lending  of  capital,  and  the  reckon- 


THE   DISTRIBUTIVE   PROCESS  in 

ing  of  the  amount  of  capital,  are  accomplished  most  familiarly  and 
easily  in  terms  not  of  concrete  goods,  but  of  value,  and  especially  in 
terms  of  money-value — pecuniarily.  We  must,  then,  give  present 
attention  to  the  concept  of  capital  as  a  fund,  partly  to  be  invested  in 
producers'  goods,  partly  to  be  used  in  purchasing  acquisitive  forms 
of  consumers'  goods,  and  even  in  some  part  to  be  loaned  and  dissipated 
in  luxurious  expenditure,  but  always  with  the  expectation  of  a  return — 
the  interest  which  is  now  to  be  explained. 

The  business  man,  as  has  previously  been  suggested,  frequently 
speaks  of  the  sum  total  of  wealth  invested  in  his  business  as  his  capital, 
regardless  of  whether  this  wealth  consists  of  land,  machinery,  or  wages 
advanced  to  labor.  Similarly,  he  is  apt  to  speak  of  the  return  from 
any  income-yielding  investment  as  interest,  irrespective  of  the  ques- 
tion whether  the  income  is  derived  from  capital,  land,  or  any  other 
source. 

The  question  where  to  draw  the  line  between  interest  and  profits 
in  particular  is  something  upon  which  economists  have  not  entirely 
agreed.  For  present  purposes  we  may,  however,  distinguish:  (a)  the 
net  return  to  capital,  as  determined  by  competitive  conditions,  without 
reference  to  the  special  form  which  the  capital  takes,  and  apart  from 
any  allowance  for  loss;  {b)  the  gain  or  loss  attributable  to  the  way  in 
which  the  capital  is  used,  and  including  elements  of  compensation 
for  industrial  risk,  of  wages  of  skilled  management,  and  of  the  excep- 
tional return  due  to  exceptional  bargaining  position.  The  factors 
enumerated  under  {b)  do  not  strictly  belong  to  the  interest  problem. 
They  will  be  considered  in  the  study  of  profits. 

Questions 

1.  Can  any  part  of  the  earnings  of  a  bootblack  be  called  interest? 

2.  Is  the  income  derived  from  the  following  interest:  a  railroad 
bond;  a  share  of  stock  in  a  land  company;  a  share  of  stock  in  a  coal- 
mining comj^any  ? 

3.  A  business  man  receives  a  salary  of  $10,000  a  year  as  president 
and  manager  of  a  shoe-manufacturing  concern;  he  receives  a  dixidend 
on  some  stock  in  the  same  company  which  he  happens  to  own;  he 
is  an  active  ]xartner  in  a  i^rofitable  leather  firm;  he  owns  a  5  per  cent 
mortgage  on  some  city  real  estate,  100  shares  of  stock  in  the  United 
States  Steel  Corporation,  and  50  shares  in  the  American  Tobacco 
Company;  and  he  has  a  savings  bank  dtjwsit  paying  3  per  cent.  To 
what  extent  does  the  element  of  interest  cnler  into  each  of  these 
varieties  of  income  ? 

4.  When  a  concern  declares  an  uiuanud  dividend  is  the  stock- 
hc)lcier  getting  interest  ? 


112  OUTLINES   OF  ECONOMICS 


2.  The  Demand  for  Capital 


a)  The  Demand  for  Capital  Goods 

b)  The  Demand  for  Funds 


a)  The  Demand  for  Capital  Goods 

Questions 

1.  Is  the  demand  for  capital  goods  a  derived  demand?  a  joint 
demand?  an  elastic  demand?  a  demand  affected  by  the  principle 
of  substitution? 

2.  Is  there  a  composite  demand  for  (a)  coal  ?  (&)  sewing  machines  ? 
(c)  churns  ?   {d)  nails  ?   (e)  gasoline  engines  ? 

3.  Explain  whether,  in  what  sense,  and  under  what  conditions  the 
demand  for  each  of  the  following  commodities  constitutes  or  involves 
a  demand  for  capital  goods:  (a)  steel  rails;  {b)  overalls;  (c)  wheat; 
{d)  candy;    (e)  wild  flowers. 

4.  How  would  a  rapid  increase  in  the  supply  of  labor  affect  the 
demand  for  {a)  labor-saving  machinery?    {b)  labor-equipping  tools? 

5.  Does  the  demand  for  a  capital  good  depend  upon  its  produc- 
tivity ? 

6.  What  is  meant  by  the  productivity  of  capital  goods  ?  Answer 
this  question  with  reference  to  (a)  a  hammer;  {b)  a  locomotive; 
(c)  raw  wool;  {d)  seed-grain;  {e)  grape-juice  as  it  comes  from  the 
wine-press. 

7.  Are  capital  goods  usually  sold  or  hired?  Are  we  concerned 
with  demand  for  the  goods,  or  with  demand  for  their  ser\dces  ? 

b)  The  Demand  for  Funds 

i.  Long-Run  Demand 
ii.  Momentary  Market  Demand 


i.  Long-Run  Demand 

Questions 

1.  Is  the  demand  for  loanal^le  funds  a  derived  demand?  a  joint 
demand?  an  elastic  demand?  a  composite  demand?  a  demand 
affected  by  the  principle  of  substitution  ? 

2.  What  do  you  think  of  the  proposition  that  the  demand  for 
'pecuniary  capital  is  derived  from  the  demand  for  capital  goods? 
Can  you  reconcile  this  statement  with  the  fact  that  pecuniary  capital 


THE   DISTRIBUTIVE   PROCESS  113 

is  the  purchasing  power  which  makes  the  demand  for  capital  goods 
effectiv'e  ? 

3.  Is  the  demand  for  loanable  funds  due  entirely  to  demand  for 
producers'  goods  ? 

4.  What  was  the  prevaihng  attitude  toward  money-lenders  in 
the  Middle  Ages?  Do  we  today  assume  the  same  attitude  toward 
bankers  who  provide  the  funds  for  business  enterprise  ?     Why  ? 

5.  Why  do  people  who  borrow  money  to  buy  consumers'  goods 
which  result  in  no  new  product  have  to  pay  the  same  rate  as  if  they 
were  borrowing  to  pay  for  productive  capital  ? 

6.  How  shou'd  you  expect  the  demand  for  pecuniary  capital  to 
be  affected  by  increase  in  the  supply  of  labor  ? 

7.  Would  a  new  and  important  invention  increase  the  demand  for 
pecuniary  capital  ? 

8.  In  what  sense  is  pecuniary  capital  productive  ? 

g.  Is  capital  in  the  pecuniary  form  more  usually  sold  or  loaned  ? 
In  the  study  of  interest  are  we  ordinarily  concerned  with  the  value 
of  such  capital  or  with  the  value  of  its  services  ? 

10.  Is  it  demand  for  capital  funds  or  demand  for  the  use  of  such 
funds  which,  strictly  speaking,  bears  upon  the  problem  of  the  interest- 
rate  ? 


ii.  Momentary  Market  Demand 

Questions 

1.  During  a  flurry  of  the  stock  market  is  the  demand  for  loans  on 
the  part  of  speculators  trying  to  "cover"  likely  to  bear  any  close 
relation  to  the  productivity  of  capital  goods  in  industrial  use  ? 

2.  Why  is  there  an  excessive  demand  for  loans  in  time  of  financial 
panic?  Is  industry  particularly  productive  at  such  times?  Are 
people  in  general  increasing  their  investments? 

3.  Why  are  the  banks  in  this  country  so  often  led  to  a  dangerous 
extension  of  loans  during  the  early  autumn  ? 

4.  The  rate  of  interest  on  "call  loans''  is  ordinarily  lower  than 
the  rate  on  loans  for  a  long  period;  but  in  time  of  panic  call-loan 
rates  may  rise  far  above  the  general  interest-rate.  Can  you  account 
for  this  phenomenon  on  the  ground  of  exceptional  conditions  of  de- 
mand? 


114  OUTLINES  OF  ECONOMICS 

3.  The  Supply  of  Capital 

a)  The  Supply  of  Capital  Goods 
h)  The  Supply  of  Funds 


a)  The  Supply  of  Capital  Goods 

Questions 

1.  Is  the  supply  of  capital  goods,  as  commodities,  subject  to  (a) 
physical  limitation  ?  {h)  social  limitation  ?  (c)  monopoly  control  ?  {d) 
the  principle  of  cost  of  production  ?     Give  examples. 

2.  Is  the  investment  of  capital  limited  by  the  conditions  which 
limit  the  supply  of  capital  goods? 

3.  Does  the  productivity  of  a  given  kind  of  producers'  goods  bear 
any  relation  to  the  supply  of  such  goods  ? 

b)  The  Supply  of  Funds 

i.  Long-Run  Supply 
ii.  Momentary  Market  Supply 


i.  Long-Run  Supply 

(i)  The  Savable  Surplus 
(2)  The  Motives  to  Saving 

The  analysis  of  the  supply  of  capital  is  somewhat  aided  by  the 
above  distinction  between  the  savable  surplus  and  the  motives  to 
saving — or,  in  the  phraseology  of  John  Stuart  Mill,  between  the 
amount  of  the  fund  from  which  saving  can  be  made,  and  the  effect- 
ive strength  of  the  desire  for  accumulation.  The  distinction  is, 
however,  arbitrary.  Plainly,  what  is  "savable"  depends  on  how 
much  privation  persons  will  undergo  because  of  their  desire  to  save. 
No  attempt  has  been  made  to  separate  the  following  questions  into 
two  groups;  but  students  should  bear  in  mind,  when  discussing  them, 
the  two  aspects  of  the  supply  of  funds  which  are  here  suggested. 

Questions 

1.  Could  an  individual  save  and  accumulate  capital  if  all  the 
goods  which  his  utmost  efforts  could  acquire  barely  maintained  him 
in  a  hand-to-mouth  existence  ? 

2.  Could  capital  be  accumulated  within  a  country  where  the  total 
amount  of  available  goods  would  barely  suffice  to  keep  alive  the 
present  number  of  inhabitants  ? 


THE   DISTRIBUTIVE   PROCESS  115 

3.  Does  accumulation  oi  capital  facilitate  further  accumulation? 
How? 

4.  What  is  saving  ?  Distinguish  the  sa\-ing  of  capital  from  hoard- 
ing. 

5.  Would  not  some  persons  refrain  from  using  all  their  income  and 
lay  by  money  "against  a  rainy  day"  even  if  there  were  in  the  mean- 
time no  opportunity  to  derive  a  return  from  its  investment  ?  If  so, 
why  should  interest  be  paid  for  loans  ? 

6.  It  is  said  that  the  rate  of  interest  has  to  be  sufficient  to  com- 
pensate the  sacrifice  made  in  saving  the  last  or  marginal  unit  01 
capital — the  unit  which  represents  the  greatest  sacrifice  in  saving. 
Why  or  why  not  ? 

7.  The  disinclination  to  save  without  compensation  's  sometimes 
stated  to  be  due  to  the  fact  that  ])ersons  ordinarily  jircfcr  present 
goods  to  future  goods;  the  extent  of  this  i)reference  being  indicated 
by  the  interest-rate  necessary  to  induce  saving.  Try  to  draw  up 
an  analytical  scheme  of  the  reasons  for  thus  discounting  a  future  goocl. 
Do  ])eople  fear  they  will  never  realize  the  good ;  or  that  its  significance 
will  not  be  the  same  when  it  comes;  or  are  they  merely  too  impatient 
to  wait  ? 

8.  Suppose  that  a  typical  college  student  of  twenty  were  offered 
(a)  money  to  pay  for  his  education;  (b)  a  theater  ticket;  (c)  a  suit 
of  clothes  in  the  present  style;  (d)  five  years'  life  insurance;  (e)  a 
mahogany  dining-table;  and  suppose  that  in  every  instance  he  were 
given  the  option  of  having  the  gift  at  once  or  ten  years  later.  How 
would  he  choose,  and  why? 

9.  Vary  the  conditions  of  the  previous  pro])lem  by  supposing  that 
the  dining-table  were  offered  now  or  not  at  all,  and  that  the  money 
for  education  were  promised  at  a  date  ten  years  later.  Would  the 
recipient  be  willing  to  borrow  money  at  interest  to  anticipate  the 
money-gift  ?  Would  he  be  willing  to  pay  storage  on  the  table  until 
he  had  need  of  it?  What  light  do  your  answers  throw  on  the  (|ues- 
tion  of  the  inclination  or  disinclination  to  save? 

10.  Does  the  necessity  of  saving  exist  because  of  the  i)resenl  organi- 
zation of  society  ?  Would  there  be  "saving"  in  a  socialistic  society  ? 
If  so,  who  would  do  the  saving  ? 

11.  "Cai^ital,  though  saved,  and  the  result  of  saving,  is  neverthe- 
less consumed.  The  word  saving  does  not  imply  that  what  is  saved 
is  not  consumed,  nor  even  necessarily  that  its  consumption  is  de- 
ferred." Explain.  Who  is  the  consumer?  Is  the  consumption 
usually  deferred  ? 

12.  It  has  been  said  that  the  original  formation  of  capital  is  due  to 
abstinence  or  saving,  but  its  permanent  maintenance  is  not.  What 
do  you  say  to  either  statement  ? 


ii6  OUTLINES   OF   ECONOMICS 

13.  How  would  an  increase  in  the  efficiency  of  'industry  affect 
the  supply  of  capital  ? 

14.  In  what  ways  might  a  more  general  and  a  better  education  of 
the  people  affect  the  supply  of  capital  ? 

15.  How  would  a  rise  of  the  standard  of  living  affect  (a)  the 
savable  surplus  ?  (b)  the  motives  to  saving  ? 

16.  How  does  the  constant  breaking  out  of  war  among  the  Central 
American  states  affect  their  supply  of  capital  ? 

17.  Is  the  effective  desire  of  accumulation  stronger  in  the  United 
States  than  in  Central  America?     Why? 

18.  What  is  it  that  prevents  capital  from  increasing  indefinitely? 
Provided  the  disposition  to  save  remains  the  same,  would  as  much  be 
saved  if  the  return  to  capital  and  labor  constantly  diminished  ? 

19.  "The  supply  of  capital  is  limited  by  considerations  of  cost, 
in  two  forms:  (a)  the  cost  of  production  of  capital  goods,  and  (b) 
the  cost,  or  sacrifice,  of  saving."  Do  you  agree  with  this  statement? 
What  is  the  remuneration  for  each  of  these  elements  of  cost  ? 

ii.  Momentary  Market  Supply 

Questions 

1.  How  would  such  a  disaster  as  the  destruction  of  San  Francisco 
affect  the  supply  of  capital  ? 

2.  Can  you  explain  high  interest-rates  in  time  of  financial  panic 
on  the  ground  of  reduced  supply  of  loans  ?  Why  should  the  supply 
be  reduced  ?     Is  there  less  desire  to  save  under  such  circumstances  ? 

3.  Banks  commonly  loan  money  "on  call"  at  very  low  rates. 
How  can  the  bark  afford  to  do  this  ?  Why  does  not  the  demand  for 
capital  for  industrial  purposes  force  the  rate  up  ?  Could  the  con- 
struction of  a  railway  be  financed  by  call  loans  ? 

4.  What  is  the  "money  market"?  Who  are  the  buyers  and 
sellers  ?     What  do  they  buy  and  sell  ? 

5.  It  is  said  that  interest  is  paid  for  capital,  not  for  money.  Is 
this  true  ? 

6.  The  economic  history  of  the  United  States  shows  that  repeat- 
edly, in  sections  of  the  country  where  capital  was  scarce,  the  people 
have  clamored  for  a  more  abundant  currency.  Do  you  think  that 
this  would  have  removed  their  difficulty? 

7.  Does  the  supply  of  money  on  the  market  affect  the  rate  of 
interest  ? 

8.  When  gold  is  leaving  England  the  Bank  of  England  raises  the 
rate  of  discount.  Does  this  show  that  the  amount  of  money  deter- 
mines the  rate  of  interest  ? 


THE   DISTRIBUTIVE   PROCESS  117 

4.  General  Questions  on  Interest 

Questions 

1.  Try  to  formulate,  in  a  few  words,  a  specific  productivity  theory 
of  interest  on  the  analogy  of  the  specific  productiWty  theory  of  wages. 

2.  Can  you  reconcile  the  statement  that  the  rate  of  interest  is 
determined  by  the  marginal  ])roductivity  of  capital  with  the  state- 
ment that  it  is  determined  Ijy  demand  and  supply  ? 

3.  It  has  also  been  stated  that  it  is  the  difference  between  the 
estimation  of  the  present  value  and  the  estimation  of  the  future 
value  of  the  last  unit  of  capital  saved  which  determines  the  rate  of 
interest.     Can  you  reconcile  this  with  the  previous  statements  ? 

4.  If  producers'  goods  merely  replaced  themselves — i.e.,  added 
to  the  product  of  industry  an  amount  equal  to  their  own  value  as 
commodities — would  there  be  any  basis  for  the  j)ayment  of  interest? 
Would  capital  be  saved?     Would  j)roducers'  goods  be  made? 

5.  How  can  you  explain  the  fact  that  several  centuries  ago  the 
rate  of  interest  on  investments  in  Holland  was  around  2  per  cent, 
while  today  it  is  considerably  above  that  ? 

6.  Can  legislation  effectively  regulate  the  rate  of  interest  ? 

7.  Is  interest  different  from  usury  ?     If  so,  what  is  the  difference  ? 

8.  Would  industry  benefit  if  the  maximum  rate  of  interest  were 
legally  fixed  at  3I  per  cent  ? 

9.  What  economic  results  would  ensue  if  the  charging  of  interest 
were  prohibited  by  law  ? 

10.  Is  capital  mobile?  Does  it  move  freely  from  one  country  to 
another?     How  extensive  is  the  market  for  capital  ? 

11.  Are  there  differences  in  the  rate  of  interest  as  between  different 
places  or  different  occupations  which  cannot  be  explained  by  differ- 
ences in  risks  ? 

12.  Why  has  the  rate  of  return  on  investments  been  around  10 
per  cent  in  the  West,  7  per  cent  in  the  Central  states,  5  per  cent  in 
New  York,  and  4  per  cent  in  Germany  ? 

13.  Does  the  net  return  from  an  investment  in  rai)ital  such  as  a 
steel  plant  tend  to  ecjual  the  net  return  from  llu'  same  amount  of 
money  invested  in  lancl,  assuming  the  risk  to  bi'  the  same  ? 

14.  Are  all  investments  in  specialized  cai)ital  h"kely  to  prove 
equally  profitable  ?     Why  ? 

15.  Suppose  that  half  a  century  ago  a  manufacturer  had  invested 
heavily  in  special  machinery  designed  to  make  hoojvskirts.  Would 
he  have  continued  to  get  interest  on  his  money? 

16.  Would  a  manufacturer  buy  a  machine  unless  he  expected  it 
to  earn  interest  on  its  cost,  after  allowing  for  depreciation? 

17.  Suppose  that  a  newly  invented  machine  at  ])resent  pays  more 


ii8  OUTLINES   OF   ECONOMICS 

than  the  prevailing  rate  of  net  return  on  its  cost  price.  Is  this 
situation  likely  to  contijiue?  Under  competitive  conditions,  will  the 
earning  power  of  the  new  machine  and  the  earning  power  of  other 
machinery  ultimately  be  equalized  ?     How  ? 


V.  Profits 


1.  Introductory 

2.  The  Risks  of  Industry 

3.  General  Questions  on  Profits 


I.  Introductory 

Profits  are  the  share  of  the  industrial  product  which  goes  to  the 
entrepreneur.     The  chief  elements  entering  into  profits  are: 

a)  The  wages  of  management,  a  return  for  assuming  the  labor  and 
burden  of  management.  This  element  tends  to  equal  the  amount 
which  the  manager  could  get  if  he  were  employed  at  a  fixed  salary. 
Some  economists  prefer  to  classify  this  under  the  head  of  wages. 

b)  A  gain  or  loss  resulting  from  the  risks  inevitable  in  industry. 
Not  only  is  there  uncertainty  in  undertaking  a  new  industry,  but 
the  more  or  less  extended  period  of  time  required  for  production  leaves 
any  industry  subject  to  the  risks  arising  from  chance  or  uncertain 
events. 

c)  An  acquisitive  gain  due  to  superior  bargaining  power,  resulting 
from  monopolistic  or  other  conditions.  For  example,  monopolistic 
position  may  enable  the  charging  of  higher  prices  for  products,  the 
paying  of  lower  prices  for  materials,  the  control  of  labor  supply,  the 
acquisition  of  special  privileges  from  public  and  semi-public  bodies, 
such  as  low  taxation  and  railway  rebates,  etc.     . 

Questions 

1.  Are  the  following  entrepreneurs:  a  cobbler,  a  farmer,  a  consult- 
ing engineer,  the  boss  of  a  section  gang,  a  banker  ? 

2.  In  a  corporation  there  may  be  bondholders,  stockholders, 
directors,  a  president,  a  treasurer,  and  a  general  manager.  Who  is  the 
entrepreneur  ?     Who  receives  profits  ? 

3.  Should  the  income  of  an  inventor  be  classified  as  wages  or 
profits  ? 

4.  A  promoter  buys  up  various  street  railway  lines,  forms  a 
new  company,  which  is  greatly  over-capitalized,  and  sells  the  stock 
at  a  gain.     Is  the  gain  profit,  and  if  so,  what  kind  of  profit  ? 

5.  What  sort  of  profit  do  you  think  has  been  the  basis  of  most  of 


THE    DISTRIBUTIVE    PROCESS  1 19 

the  more  recently  acquired  large  fortunes  in  this  country  ?  Are  they 
the  result  of  acquisitive  or  of  productive  effort  ?  What  have  the 
owners  done  to  serve  society  ? 

6.  The  syndicate  which  underwrote  the  securities  of  the  United 
States  Steel  Corporation  is  said  to  have  made  over  $60,000,000. 
Was  that  profit  ?     Do  you  think  it  was  earned  ? 

7.  Give  instances,  taken  from  the  actual  business  world,  in  which 
profits  are  to  be  regarded  as  essentially  (a)  wages  of  management; 
(b)  the  result  of  a  fortunate  issue  of  a  risky  enterprise;  (c)  due  to 
monopoly  of  the  sale  of  the  product;  (d)  extortion  from  underpaid 
laborers;  (e)  "graft,"  under  the  form  of  franchise  prixilege,  or  of 
immunity  from  prosecution  for  illegal  acts. 


2.  The  Risks  of  Industry 


a)  The  Nature  of  Industrial  Risks 
h)  Speculation  in  Relation  to  Risks 
c)  Insurance  in  Relation  to  Risks 


a)  The  Nature  of  Industrial  Risks 

Questions 

1.  Describe  some  of  the  chief  risks  in  industry.  Group  these  into 
classes. 

2.  Is  the  process  of  production  in  modern  industry  sjjread  over  a 
longer  period  of  lime  and  is  it  more  roundabout  than  formerly? 
How  does  this  affect  risks  ? 

3.  If  everyone  endeavored,  year  after  year,  to  make  the  same 
articles  in  the  same  way,  to  sell  the  same  quantities  at  the  same 
prices,  and  to  buy  the  same  variety  of  goods  at  the  same  shops, 
would  the  risks  of  business  disappear  ? 

4.  Are  risks  greater  in  a  changing  condition  of  industry  ?  Why 
or  why  not  ? 

5.  Assuming  that  industrial  methods  are  constantly  changing, 
should  you  agree  to  the  suggestion  that  those  persons  who  are  pioneers 
in  introducing  the  new  methods  make  profits  because  of  the  change, 
and  that  those  who  cling  to  obsolete  methods  are  commonly  losers  ? 
Explain  your  answer. 

6.  Is  it  i>ossil:>lc  by  foresight  and  calculation  to  refkice  or  to  avt^d 
some  of  the  risks  of  industry?  ail  of  the  risks  of  industry? 

7.  Do  you  think  that  some  men  ha\e  special  abih'ty  to  grajiple 
successfully  with  the  risks  and  changes  of  business?     If  their  ability 


I20  OUTLINES   OF  ECONOMICS 

were  recognized  as  characteristic  would  they  not  command  high 
salaries  as  managers  ? 

8.  Is  the  theory  of  differences  of  wages  according  to  differences 
of  ability  sufficient  to  explain  the  business  man's  gains  from  successful 
running  of  risks  ?     Would  it  explain  losses  ? 

9.  If  we  were  to  have  a  socialistic  society  would  risks  disappear  ? 

b)  Speculation  in  Relation  to  Risks 

We  may  distinguish  two  forms  of  speculation:  (a)  industrial; 
(b)  commercial.  Industrial  speculation  consists  in  preparing  for 
market,  by  changing  the  form,  products  the  demand  for  which  is 
uncertain,  or  products  whose  conditions  of  production  are  unknown  or 
shifting.  Commercial  speculation  consists  in  buying  goods  in  one 
market  and  seUing  them  in  another  where  different  price  conditions 
prevail,  or  in  buying  at  one  time  for  sale  at  a » more  or  less  remote 
time.  A  certain  degree  of  speculation  is  inherent  in  all  competitive 
business.  Successful  speculation  involves  profits;  the  speculator 
is,  however,  always  exposed  to  losses. 

Both  industrial  and  commercial  speculation  are  carried  on  largely 
by  persons  who  make  a  careful  study  of  conditions  of  supply  and 
demand,  and  are  therefore  better  fitted  to  perform  this  function  than 
are  others.  The  chances  of  sudden  wealth,  however,  attract  to  the 
speculative  market  large  numbers  of  men  who  have  no  special  knowl- 
edge of  conditions  affecting  the  goods  in  which  they  deal.  Not  only 
do  they  usually  suffer  personal  losses;  but  through  rash  buying  when 
prices  tend  to  rise  and  precipitate  selHng  when  prices  tend  to  fall 
they  exaggerate  the  natural  tendency  toward  price  fluctuation.  There 
are  also  men  who  are  skilled  in  market  conditions  who  manipulate  the 
market  and  cause  fluctuations  which  would  not  otherwise  exist. 

When  a  speculative  market  has  developed,  the  actual  producers 
of  commodities  can  frequently  transfer  many  of  the  risks  of  price 
change  to  the  professional  speculator.  In  a  speculative  market 
contracts  for  purchases  or  sales  may  be  made  at  any  time,  to  mature 
at  some  future  period.  A  man  who  contemplates  producing  pig 
iron  may  insure  himself  against  a  price  insufficient  to  cover  materials 
and  other  expenses  by  selling  pig  iron  for  future  delivery  to  a  specu- 
lator. If  the  price  of  pig  iron  declines  it  is  the  speculator  who  bears 
the  loss.  When  the  finished  product  is  not  of  a  character  to  admit 
of  speculative  dealings,  the  manufacturer  may  nevertheless  insure 
himself  against  serious  price  fluctuations  by_  speculative  dealings 
in  the  raw  materials,  since  the  finished  product  and  the  raw  material 
usually  undergo  parallel  price  fluctuations. 

An  example  wifl  illustrate.     A  miller  buys  in  February  10,000 


THE   DISTRIBUTIVE   PROCESS  12 1 

bushels  of  wheat  to  turn  into  flour  which  he  has  contracted  to  deliver 
June  I,  at  the  market  price  then  rulin";.  To  avoid  the  risks  of  a 
change  in  the  i)rice  of  wheat  in  the  interval,  and  of  a  consecjuent 
change  in  the  market  price  of  flour  at  which  he  will  have  to  sell, 
he  "hedges"  by  selling  "short,"  for  future  delivery,  10,000  bushels 
of  "May  wheat"  at  the  same  time  that  he  buys  for  cash  in  February. 
If  quotations  are  for 

Cash  wheat  in  February   $1 .02 

May  wheat  in  February i  .04 

Cash  wheat  in  May i  .01 

then  the  transaction  will  be  as  follows: 

February  Wheat  Account  May  Wheat  Accouat 

Cost  of  cash  wheat $10,200  Received   for  "short  sale"  of 

Storage,     insurance,     interest,  May  wheat  in  February  .  .  .  $10,400 

etc 195  Cost  of  cash  wheat  in  May  to 

"cover" 10,100 


Total  cost  of  wheat $10,395 

Value  in  May  of  the  wheat  used  Profit  on  transaction $300 

in  making  the  flour 10,100 


Miller's  loss  by  fall  in  price..       $295 

Thus,  though  the  miller's  decision  to  buy  his  wheat  in  February 
results  in  a  loss  of  $295,  on  account  of  the  lower  ])rice  of  wheat  in 
May,  the  "hedging"  transaction  offsets  this  loss  by  a  gain  of  n$3oo. 

Questions 

1.  Work  out  the  above  case  of  dealing  in  wheat,  substituting,  as 
the  price  of  cash  wheat  in  May,  (a)  $1 .08,  (b)  $0.90. 

2.  A  certain  cotton  manufacturer  displays  great  ability  in  the 
production  of  cloth,  but  he  is  nevertheless  l)arely  able  to  keep  his 
head  above  water,  because  he  is  a  poor  judge  of  the  raw  cotton  market 
and  is  more  likely  than  not  to  buy  when  prices  are  inllated.  Show 
how  he  could  liberate  himself  from  the  conse(|uences  of  this  defect 
of  judgment. 

3.  Miller  A  always  covers  purchases  of  wheat  for  milling  by 
corresponding  short  sales.  Miller  B  boasts  that  he  is  no  spectilator, 
and  refrains  entirely  from  transactions  on  the  exchange.  Whether 
prices  rise  or  fall,  A  is  insured  his  miller's  ])r()fit,  and  ne\-er  receives 
more.  If  prices  rise,  H  makes  a  \)Vf){\[  owr  and  abox'e  his  miller's 
profit.  When  ])rices  fall,  not  only  may  his  miller's  profit  be  wiped 
out,  but  he  may  incur  additional  losses.  Which  one  is  really  the 
speculator  ? 

4.  Ill  igo6  a  shii)ment  of  Dakota  grain  was  sent  by  way  of  Seattle 
to  Japan.     By  the  lime  the  gr;iin  reached  Japan  the  jM-ices  of  wheat 


122  OUTLINES   OF   ECONOMICS 

there  had  fallen  so  low  that  this  shipment  was  reconsigned  to  Liver- 
pool, and  sold  at  a  price  inferior  to  that  paid  for  the  wheat  in  Dakota. 
Did  the  actual  shippers  of  the  wheat  necessarily  lose  on  the  trans- 
action ? 

5.  Speculators  are  often  regarded  as  mere  gamblers.  If  the  whole 
body  of  speculators  were  to  cease  buying  and  selling  grain,  and  limited 
themselves  to  betting  upon  the  course  of  prices,  would  the  work  of 
commerce  and  industry  be  carried  on  exactly  as  it  is  at  present  ? 

6.  Farmers  often  urge  the  abolition  of  speculative  exchanges  on 
the  ground  that  they  depress  the  price  of  produce;  millers  and  spinners 
urge  this  abolition  on  the  ground  that  they  enhance  prices.  What 
is  your  opinion  of  the  situation  ?  Do  you  think  it  is  true,  as  has 
been  contended,  that  short  sales  create  an  artificial  increase  of  supply, 
and  necessarily  lower  prices  for  that  reason  ? 

7.  Do  men  speculate  because  prices  fluctuate  or  do  prices  fluctuate 
because  men  speculate  ? 

8.  It  has  been  maintained  that  grain-speculators  as  a  class  cannot 
gain  by  a  rise  in  price  of  their  own  creating.  Why  ?  Do  the  same 
reasons  prevent  individual  speculators  from  manipulating  prices  to 
their  own  advantage  ? 

g.  Would  the  foregoing  statement  hold  true  of  speculators  on  the 
stock  exchange  ?     Why  ? 

10.  Would- speculation  be  destroyed  if  the  organized  speculation 
of  the  exchanges  were  prohibited  by  law  ? 

11.  Short  sales  of  land  are  by  nature  impossible.  Does  this 
fact  interfere  with  speculation  in  land,  or  make  such  speculation  less 
hazardous  than  speculation  in  produce  or  securities  ? 

12.  During  the  Ci\dl  War  certain  wool  manufacturers  made 
enormous  profits  because  of  the  rise  in  price  of  raw  materials  which 
they  had  on  hand.  After  the  war  there  were  cases  where  these  profits 
were  nearly  wiped  out  by  losses  consequent  upon  the  fall  in  prices 
of  raw  materials.     Explain.     Could  the  loss  have  been  avoided? 

13.  "Industrial  speculation  anticipates  the  wants  of  society.  If 
the  speculator  has  judged  wisely,  society  is  better  provided  with 
goods  than  it  would  have  been  had  its  entrepreneurs  been  averse  to 
taking  chances.  If  the  speculator  has  miscalculated,  he  incurs  a 
pecuniary  loss  and  society  suffers  from  wasted  resources."  Is  this 
true  ?  Write  out  a  similar  statement  concerning  commercial  specu- 
lation. 

14.  It  is  argued  that  if  a  shortage  of  a  staple  commodity  occurs, 
a  rise  in  its  price  is  a  social  advantage.  Explain,  using  as  illustrative 
commodities  {a)  ice;  (h)  sugar;    (c)  structural  steel. 

15.  State  briefly  your  opinion  of  the  relation  of  speculation  to 
industry. 


THE   DISTRIBUTIVE   PROCESS  123 

16.  How  do  you  distinguish  between  socially  desirable  and  socially 
undesirable  speculation  ? 


c)  Insurance  in  Relation  to  Risks 

The  discussion  of  speculation  showed  that  in  many  cases  specu- 
lative markets  make  insurance  against  risks  possible.  Insurance  is 
treated  in  this  present  section  with  particular  reference  to  the  definitely 
organized  business  of  insurance,  e.g.,  fire  insurance,  etc. 

Questions 

1.  Why  do  people  insure  against  risk?  Does  insurance  decrease 
risks  ? 

2.  What  is  the  service  performed  by  an  insurance  company? 
Is  insurance  productive  ? 

3.  What  determines  the  premium  paid  for  insurance?  In  the 
long  run,  do  premiums  paid  exceed  in  aggregate  amount  the  settle- 
ments for  losses  ?  If  so,  how  can  a  person  afford  to  carry  insurance  ? 
If  not,  how  can  insurance  companies  remain  solvent  ? 

4.  Suppose  one  concern  owns  buildings  in  a  great  many  difTerent 
places,  so  that  the  fire  risk  is  distributed.  Would  it  pay  better  to 
insure  in  a  fire  insurance  company,  or  merely  to  set  aside  a  reserve 
against  losses  ?  For  example,  should  the  Pennsylvania  Railroad  Co. 
insure  its  station  buildings?  Should  the  Postofiice  Department 
insure  the  fittings  of  rural  post-offices  ? 

5.  Does  insurance,  such  as  fire  insurance  or  plate-glass  insurance, 
enter  into  the  cost  of  production  ? 

6.  Is  the  number  of  fires  likely  to  be  increased  by  the  fact  that 
buildings  are  insured  ? 

7.  In  some  cities  the  fire-insurance  companies  contribute  heavily 
to  the  maintenance  of  fire  departments.  Is  this  properly  a  part  of 
the  insurance  business  ? 

8.  One  insurance  company  has  insured  Ijuildings  ])retty  generally 
throughout  the  country;  another  has  confined  itself  exclusively  to 
a  certain  city.  With  which  should  }ou  prefiT  to  insure  your  property, 
and  why  ? 

g.  Insurance,  like  speculation,  has  sometimes  been  likened  to 
betting.  I  pay  $36  to  a  certain  company:  if  my  house  burns  down 
within  three  years,  the  company  pays  me  $3,000.  This  means,  in  a 
certain  way  of  thinking,  that  I  Ix't  S36  against  83,000  that  my  house 
will  burn  down.  Is  this  a  projjcr  view  of  the  situation  ?  If  I  were  a 
gambler  by  disjKJsition,  should  I  be  likely  to  insure  my  house  ? 

10.  At  the  time  of  the  coronation  of  King  Edward  \'IT  London 


124  OUTLINES   OF   ECONOMICS 

tradesmen  look  out  insurance  against  his  death.  Again,  when  King 
George  V  was  crowned,  the  rain-insurance  reached  very  large  figures. 
Why  ?     Is  such  insurance  of  benefit  to  society  ? 

11.  Is  it  possible  for  manufacturing  concerns  to  unite,  apply  fire 
protection  scientifically,  exclude  those  who  will  not  protect,  and 
reduce  fire  losses  to  a  minimum  ?     Is  that  an  advantage  to  society  ? 

12.  Why  are  there  no  insurance  companies  that  undertake  to 
insure  producers  against  price  fluctuations  ? 

13.  Why  should  not  insurance  companies  undertake  to  bear  the 
risks  of  business  and  to  pay  (or  charge)  to  entrepreneurs  a  fixed 
annual  sum  in  commutation  ? 


3.  General  Questions  on  Profits 

The  student  should  keep  in  mind  the  fact  that  the  subject  of 
profits  covers  losses  as  well  as  gains.  Differences  in  profits  are  not 
simply  the  difference  between  a  large  profit  and  no  profit,  but  also 
the  difference  between  a  large  profit  and  a  heavy  loss. 

Questions 

1.  Do  profits  tend  to  an  eciuilibrium  as  between  different  indi- 
viduals ?  different  occupations  ?  different  places  ? 

2.  It  is  said  profits  and  losses  in  a  given  industry  tend  to  balance 
each  other.     Is  this  true  of  gold  mining  ?     Why  or  why  not  ? 

3.  Are  differences  in  profits  due  more  to  skill  and  ability  than  to 
chance  ? 

4.  Are  the  profits  of  a  business  man  a  good  measure  of  his  service 
to  society  in  the  production  of  wealth  ? 

5.  "Profits  are  analogous  to  rent  in  that  the  skilled  risk-taker 
gets  a  differential  return  over  the  risk-taker  of  ordinary  capacity." 
Why  or  why  not  ? 

6.  Do  profits  enter  into  cost  of  production  ? 

7.  If  an  industry  were  generally  depressed,  but  one  employer  were 
by  exception  making  high  profits,  what  rate  of  wages  would  he  pay  ? 
If  industry  were  prosperous,  but  one  employer  were  by  exception 
making  no  profit,  what  rate  of  wages  would  he  pay  ? 

8.  "The  entrepreneur  is  the  residual  claimant  of  industry." 
What  does  this  mean  ?     Do  you  think  the  statement  is  true  ? 

g.  According  to  the  specific  productivity  theory  land,  labor,  and 
capital  tend  severally  to  receive  returns  commensurate  with  their 
respective  productive  services.  If  this  is  true,  what  is  left  for  the 
entrepreneur  ? 

10.  Is  business  management  to  be  regarded  as  a  fourth  pro- 


THE   DTSTRllUTn'K    FROrESS  125 

ductive  factor,  co-ordinate  in  importance  with  land,  labor,  and  capital, 
or  is  it  merely  the  proper  proportioning  of  those  three  factors  ? 

11.  In  a  new  industry,  or  when  new  methods  are  introduced  into 
an  old  industry,  profits  are  said  to  be  due  to  the  temporary,  exceptional 
productivity  of  land,  labor,  and  capital  which  are  nevertheless  paid 
for  at  the  rates  previously  paid  in  other  industries.  If  so,  would 
profits  disappear  as  soon  as  the  new  industry  was  established  on  a 
basis  of  general  competition  ? 

12.  After  a  change  in  industrial  methods  which  greatly  increases 
productive  capacity,  profits  are  commonly  no  greater  than  before; 
yet  after  all  we  depend  on  the  self-interest  of  the  entrepreneur  and 
his  desire  for  profit  to  secure  both  (a)  the  introduction  of  better 
methods  and  (b)  their  maintenance  after  introduction.  Explain  how 
this  can  be. 

13.  "Monopoly  j^yrofits  are  more  likely  to  be  ]icrmanent  than 
competitive  profits."     Do  you  agree  ? 

14.  In  what  way  will  a  sudden  depreciation  of  the  currency  affect 
profits  ?  a  sudden  appreciation  ? 

15.  "Profits  as  a  return  for  risk  is  nonsense.  We  know  that 
many  men  engage  in  industry  because  they  love  independence  and 
delight  in  risks.  They  would  engage  in  industry  even  if  there  were 
no  return  to  risk."     Comment. 

16.  "Profits  are  a  great  factor  in  promoting  economic  progress." 
"Profits  are  unnecessary.  These  gains  should  go  to  the  other  factors 
of  production."  With  which  statement  do  you  agree?  Does  it 
make  any  difference  whether  the  profits  spoken  of  are  monopoly 
profits  or  competitive  profits  ? 

17.  What  definition  of  profits  do  you  accept  ? 

18.  Could  it  be  said  that  profits  are  determined  by  the  demand  for 
business  management  and  the  supply  <;f  managerial  ability? 


G.     PtJBLIC  FINANCE  AND  TAXATION 

I.     The  Forms  of  Public  Expenditure 
II.     The  Sources  of  Public  Revenue 


I.  The  Forms  of  Public  Expenditure 

Questions 

1.  Draw  up  a  classified  list  showing  the  more  important  items  of 
, expenditure  of  the  federal,  state,  and  local  governments  in  the  United 

States. 

2.  Why  should  the  following  facilities  and  services  be  provided  by 
the  government  rather  than  by  private  persons:  military  defense; 
police;  administration  of  justice;  postal  service;  roads;  street- 
lighting;  lighthouses;  improvement  of  rivers  and  harbors;  preserva- 
tion of  forests;  agricultural  experiment  farms;  parks  and  play- 
grounds; sewers;  medical  examination  of  school  children;  hospitals; 
asylums;   poor  reUef;    protection  against  fire;    libraries;    museums? 

3.  From  a  purely  selfish  viewpoint  is  it  to  the  advantage  of  par- 
ticular individuals  to  avoid  the  payment  of  taxes  ?  Would  it  be  ad- 
vantageous if  everyone  avoided  taxation  ? 

4.  If  the  government  renders  services  which  are  greater  in  pro- 
portion to  the  money  spent  than  individuals  could  procure  for  them- 
selves, should  the  poor  be  exempt  from  contributions  to  the  support 
of  government  ? 

5.  Should  government  expenditures  be  absolutely  small,  or  merely 
small  in  relation  to  the  benefits  to  be  secured  ? 

6.  Are  government  activities  in  general,  at  the  present  day,  increas- 
ing in  scale  ?  In  range  ?  Why  ?  Does  this  imply  larger  public 
expenditures  ? 

II.  The  Sources  of  Public  Revenue 

1.  Public  Loans 

2.  Public  Domain 

3.  Public  Industries  and  Investments 

4.  Fees  and  Assessments 

5.  Taxation 

I.     Public  Loans 

By  borrowing,  a  government  may  utilize  unemployed  private 
capital  in  meeting  extraordinary  needs  for  expenditures  too  great 

126 


PUBLIC   FINANCE   AND   TAXATION  -    127 

to  be  paid  from  the  ordinary  public  revenues.  The  burden  of  the 
loan  can  thus  be  distributed  over  a  scries  of  years  by  payments  for 
interest  and  sinking  fund.  Such  borrowing  may  become  an  abuse 
if  it  results  in  i)ledging  the  income  of  the  future  for  merely  present 
benefits.  It  is  justifiable  in  the  adjusting  of  slight  temporary  deficits, 
and  also  (i)  as  a  means  of  tiding  over  some  great  emergency,  or  (2) 
to  provide  for  government  investments  on  cai)ital  account  from  which 
is  expected  to  result  either  (a)  el  definite  income  sufficient  to  cover 
the  interest  and  the  ultimate  repaying  of  the  principal  of  the  loan, 
or  (6)  a  real  and  lasting,  though  less  tangible,  benefit  accruing  in  the 
future. 

Questions 

1.  A  municipality  sells  bonds  (a)  to  l)uild  a  schoolhouse;  (b)  to 
instal  a  system  of  sewers;  (c)  to  construct  waterworks;  (d)  to  pro- 
vide a  public  display  of  fireworks  on  the  Fourth  of  July.  Which  of 
these  transactions  meet  your  approval  ? 

2.  During  the  development  of  transportation  facilities  in  the 
Middle  West  several  states  issued  bonds  as  a  means  of  providing 
money  for  the  construction  of  canals.  Interest  on  the  bonds  was  to 
be  derived  from  the  earnings  of  the  canals,  after  they  were  completed. 
Was  this  a  legitimate  method  of  raising  re\'enue  ? 

3.  In  time  of  war  governments  commonly  borrow  to  a  \'ery  large 
extent.  Is  this  good  policy?  Does  the  war  provide  the  means  for 
the  payment  of  interest  or  the  repayment  of  the  debt  ? 

4.  When  a  go\'ernment  issues  paper  money  in  the  form  of  notes 
redeemable  in  gold  on  demand  is  it  borrowing  ? 

5.  What  are  the  advantages  or  disadvantages  of  note  issue  as 
contrasted  with  Ijond  issue  for  purposes  of  public  finance  ?  Do  the 
circulating  notes  bear  interest?  Are  they  sure  to  be  ultimately 
presented  for  payment  ? 

6.  During  the  latter  part  of  the  Civil  War  the  United  States 
government  issued  large  quantities  of  greenbacks  in  exchange  for 
supplies  bought  at  the  high  prices  then  prexailing  as  a  result  of  the 
inflation  of  the  currency  by  previous  issues.  Subsequently  the  govern- 
ment-has been  redeeming  the  greenbacks  in  gold  in  times  of  much 
lower  prices.     Was  the  transaction  wise? 

7.  The  Cle\ehuul  administration,  at  tin-  tiiiir  of  tlu'  lurrency 
troubles  of  1893,  resorted  to  the  sale  of  bonds  and  paid  out  the  prt)- 
ceeds  in  redem|)tion  of  the  greenbacks  and  treasury  notes  which  were 
being  presented  for  payment.  This  expedient  has  been  much  criti- 
cized.    Do  you  think  it  was  approi)riate  ? 


128  OUTLINES   OF   ECONOMICS 


2.  Public  Domain 


The  public  domain,  which  was  an  important  source  of  revenue 
in  feudal  times  and  in  monarchies  which  preserved  the  usages  of 
feudalism,  yields  little  income  in  the  United  States.  This  is  due  to 
the  fact  that  here  the  general  policy  has  been  to  grant  pubHc  lands, 
etc.,  on  easy  terms  to  private  owners,  rather  than  to  exact  payment 
for  their  use.  Possibly  the  charging  of  royalties  for  the  use  of  timber 
and  mineral  lands  and  for  water  power  may  become  more  prevalent. 
At  present  the  revenue  thus  derived  is  so  slight  as  to  be  unimportant, 
especially  in  view  of  the  expenses  of  maintaining  the  public  domain. 

3.  Public  Industries  and  Investments 

The  primary  purpose  of  governmental  industry  may  be  (i)  to 
restrict  the  use  of  certain  commodities,  as  opium,  alcohol;  (2)  to 
render  improved  service;  (3)  to  maintain  a  so-called  fiscal  monopoly. 
In  the  first  and  second  cases  revenue  is  more  or  less  incidental;  in  the 
third  the  expectation  of  revenue  is  the  dominant  motive. 

Questions 

1.  What  forms  of  public  industry  are  maintained  in  this  country, 
and  what  is  the  reason  for  state  control  in  each  case  ? 

2.  Is  the  government  mail  service  either  fiscal  or  restrictive  in 
character  ? 

3.  What  is  the  purpose  of  the  tobacco  monopoly  of  the  French 
government  ? 

4.  Fees  and  Assessments 

A/eg  is  a  contribution  exacted  from  a  person  (natural  or  corporate) 
to  defray  in  part  or  in  full  the  expense  of  a  specific  service  rendered 
him  by  the  government:  e.g.,  the  fees  in  connection  with  court  pro- 
ceedings, with  the  issue  of  certificates  of  various  sorts,  or  with  special 
facilities  rendered  by  public  educational  institutions. 

A  special  assessment  is  a  compulsory  contribution,  levied  upon 
persons  who  are  assumed  to  derive  particular  benefit  from  some  pubKc 
facility  or  ser\dce  provided  primarily  for  the  general  good,  and  appor- 
tioned among  them  according  to  their  participation  in  the  benefit: 
e.g.,  assessments  for  betterments  levied  on  owners  of  property  abutting 
on  streets  which  are  widened,  paved,  etc. 

It  should  be  noted  that  the  services  for  which  fees  are  charged 
are  also  rendered  with  reference  to  the  public  good,  as  is  implied  by 
their  governmental  character;  but  they  ordinarily  involve  the  general 


PUBLIC   FINANCE  AND   TAXATION  129 

welfare  less  obviously  than  do  the  services  which  give  rise  to  special 
assessments,  and  they  are  commonly  rendered  in  response  to  the 
specific  request  of  the  person  who  pays  the  fee. 

Questions 

1.  Do  the  fees  incidental  to  litigation  interfere  with  the  proper 
administration  of  justice? 

2.  Would  litigation  be  mure  prevalent  and  prolonged  if  all  the 
expenses  were  borne  by  the  government  without  the  charging  of 
fees  ?     Would  this  promote  justice  ?     Would  it  be  economical  ? 

3.  Is  it  desirable  or  fair  to  make  the  peaceable  members  of  a 
community  pay  for  the  contentions  of  those  who  are  constantly  going 
to  law  ? 

4.  Do  you  know  of  cases  in  which  the  fees  collected  by  pubHc 
officials  have  exercised  a  demoralizing  influence  in  politics  ? 

5.  Is  special  assessment  an  approi)riate  method  of  pa>ang  for 
improvements  in  a  street  (a)  if  the  abutting  property  owners  desire 
the  improvement  ?   (b)  if  they  oppose  it  ? 

6.  Do  you  know  of  cases  in  which  special  assessments  have  taken 
the  form  of  exploitation  of  property  owners  for  the  benefit  of  the 
contractors  who  were  given  the  job  ? 

5.  Taxation 

a)  Canons  of  Taxation 

b)  Forms  and  Incidence  of  Taxation 

c)  Tax  Reform 

"A  tax  is  a  general  compulsory  contribution  of  wealth  collected 
in  the  general  interest  of  the  community  from  indi\iduals  or  corpora- 
tions by  an  exercise  of  the  sovereign  power  of  government,  and  levied 
without  reference  to  the  s])ecial  benefits  which  the  contributors  may 
severallv  derive  from  the  ])ublic  purjioses  for  which  the  re\-enue  is 
rec|uired." — U.S.  Census  Report  on  Wealth,  Debt,  and  Taxation. 

a)  Canons  of  Taxation 

i.  The  Principle  of  Benefit 
ii.  The  Principle  of  Ability  or  Faculty 

Taxation  is  the  principal  source  of  public  revenue,  yielding  in 
this  country  al)out  three-quarters  of  the  total  re\enue  of  the  gi)vern- 
ment.  Consequently  it  is  of  the  greatest  importance  to  devise  a 
system  of  taxes  which  shall  ln'  in  the  highest  possible  degree  efficient 
and  equitable.     Simplicity,  stability,  convenience,  and  economy  in 


I30  •  OUTLINES   OF  ECONOMICS 

collection,  with  the  largest  possible  3deld,  are  criteria  of  a  good  tax. 
The  justice  of  different  forms  of  taxation  is  tested  by  certain  canons 
or  principles  of  which  the  most  important  are  considered  below, 

i.  The  Principle  of  Benefit 

Questions 

1.  Would  it  be  equitable  (a)  to  tax  German  subjects  in  order  to 
enlarge  the  British  navy?  {b)  to  tax  citizens  of  CaUfornia  to  build 
roads  in  New  York  ?  (c)  to  tax  the  citizens  of  the  United  States  in 
general  to  deepen  the  harbors  of  coast  cities  ?  {d)  to  impose  a  protect- 
ive tariff  which  raises  prices  throughout  the  country  for  the  benefit 
of  a  local  industry  ?  (e)  to  tax  the  rich  for  the  support  of  poorhouses  ? 
(/)  to  tax  the  childless  for  the  maintenance  of  public  schools  ? 

2.  Should  you  agree  that  individuals  should  not  be  forced  to 
support  public  activities  from  which  they  do  not  consciously  benefit 
or  that  the  burden  of  a  given  tax  should  be  distributed  in  proportion 
to  benefits  received? 

3.  If  taxation  were  regulated  exclusively  according  to  the  prin- 
ciple of  benefit,  would  taxes  dilf er  from  fees  ? 

4.  Is  it  proper  for  the  state  to  care  for  needy  citizens  ?  If  so,  who 
is  to  pay  ? 

5.  How  could  one  determine  how  much  a  given  citizen  was  bene- 
fited by  the  construction  of  a  "Dreadnought"  ?  by  the  maintenance 
of  the  Supreme  Court  of  the  United  States  ? 

6.  Do  the  rich  or  the  poor  benefit  more  by  the.  activities  of  govern- 
ment ?  Which  is  the  more  dependent  on  government :  the  man  with 
much  to  gain  or  the  man  with  much  to  lose  ? 

ii.  The  Principle  of  Ability  or  Faculty 

Questions 

1.  Can  it  be  maintained  that  the  well-to-do  should  pay  more  tax 
than  the  poor  on  the  ground  that  (a)  the  poor  have  a  right  to  be  sup- 
ported by  the  wealthy?  {b)  the  possession  of  wealth  is  prima  facie 
evidence  that  the  possessor  has  enjoyed  special  benefits  as  a  result 
of  living  under  the  government  which  he  is  asked  to  support  ?  {c) 
ethically,  one  should  sacrifice  himself  for  others  as  far  as  possible  ?  {d) 
someone  must  pay,  and  the  poor. cannot  pay  without  great  hardship  ? 

2.  Is  taxation  according  to  ability  a  penalty  on  attainment  and  a 
premium  for  sloth? 

3.  What  is  the  test  of  ability  to  pay?  Is  ability  proportional  to 
income  ?  to  property  ?  Is  it  measured  by  excess  of  possessions  above 
a  minimum  regarded  as  indispensable  ? 


PUBLIC   FINANCE  AND   TAXATION  131 

4.  Are  indirect  taxes  inequitable  in  that  they  raise  for  all  persons 
alike  the  cost  of  necessities  of  life  ? 

5.  Is  equality  of  sacrifice  a  satisfactory  criterion  of  the  justice 
of  taxation  ? 


b)  Forms  and  Incidence  of  Taxation 

i.  The  General  Property  Tax 

ii.  Customs  Duties 
iii.  Excise  Taxes 
iv.  Income  Taxes 

V.  Inheritance  Taxes 

vi.  Corporation  and  Business  Taxes 


i.  The  General  Property  Tax 

Questions 

1.  Who  bears  the  burden  of  (c)  an  estabhshed  tax  on  land?  (/;)  a 
newly  ini])osed  tax  on  land  ? 

2.  Who  bears  the  burden  of  a  tax  on  buildings  (a)  if  the  tax  is 
imposed  after  the  buildings  are  constructed?  (b)  if  the  buildings  are 
constructed  after  the  tax  has  gone  into  effect  ? 

3.  Should  real  pro])erty  and  personal  property  be  subject  to  the 
same  sort  of  taxation  ?  Should  the  same  tax  be  levied  on  (a)  land  and 
buildings  ?   (b)  furniture  and  investment  securities  ? 

4.  It  is  maintained  that  because  of  the  widespread  evasion  of  taxes 
on  intangible  personal  ])roperty,  those  owners  of  stocks  and  bonds 
who  do  declare  their  holdings  are  forced  to  i)ay  in  taxes  an  exorbitant 
proportion  of  their  income.  Is  their  burden  heavier  than  that  of  the 
landowner  ?     Why  or  why  not  ? 

5.  Might  a  low  rate  of  taxation  on  intangible  personal  ]tro]icrty 
Ijring  in  more  than  a  high  rate  ?     Why  ? 

6.  If  all  investments  in  stocks  and  bonds  were  drclarid  for  taxa- 
tion would  the  aggregate  value  of  taxable  property  be  appreciably 
greater  than  is  now  the  case?      Could  present  tax-rates  be  lowered? 

7.  What  ad\'antages  has  a  high  tax-rate  on  a  low  assessment  over 
a  low  rate  on  a  high  assessment  from  the  stand])oint  of  (a)  the  tax- 
payer? (/;)  a  city  desirous  to  issue  bonds?  (c)  a  landowner  trying  to 
mortgage  his  proj^erty  ?  (</)  a  municii)ality  required  to  ]iay  over,  out 
of  its  receijits  from  taxation,  a  iixed  numlxT  of  mills  on  the  dollar  as  a 
state  tax  ? 

8.  It  is  contended  that  the  general  jirojierty  tax,  by  making  it 
relatively  uni)r()litable  to  hold  landed  property,  encourages  exhausting 


132  OUTLINES   OF  ECONOMICS 

cultivation,  slaughter  of  timber  lands,  and  exploitation  of  natural 
resources  in  general.     Explain. 

9.  Is  the  general  property  tax  equitable  ?     Is  it  effectual  ? 

ii.  Customs  Duties 

Questions 

1.  What  advantages  does  a  system  of  customs  duties  offer  as  a 
means  of  raising  revenue  ? 

2.  Would  customs  duties  be  a  satisfactory  source  of  revenue  for 
the  United  States  in  time  of  war  with  a  great  naval  power  ? 

3.  Make  a  list  of  the  disadvantages  of  a  system  of  customs  duties. 

4.  Should  customs  duties  for  purpose  of  revenue  preferably  be 
imposed  on  necessities  or  on  luxuries?  on  goods  with  an  elastic 
demand  or  on  goods  with  an  inelastic  demaid  ?  Does  your  conclu- 
sion conform  to  the  principle  of  ability  to  pay  ? 

5.  Is  a  protective  tariff  an  economical  method  of  taxation  ? 

6.  Mention  five  commodities  on  which  import  duties  for  purpose 
of  revenue  would  in  the  case  of  this  country  be  especially  appropriate. 

7.  Distinguish  between  specific  and  ad  valorem  duties.  Mention 
a  commodity  on  which  a  specific  duty  would  be  the  better.  Mention 
a  commodity  on  which  an  ad  valorem  duty  would  be  preferable. 

8.  Who  bears  the  burden  of  a  revenue  tariff? 

9.  Who  bears  the  burden  and  who  gets  the  benefit  of  a  protective 
tariff  (a)  in  so  far  as  the  taxed  commodities  are  chiefly  imported? 
(b)  in  so  far  as  the  taxed  commodities  are  chiefly  produced  within 
the  country? 

iii.  Excise  Taxes 

Questions 

1.  Define  excise  taxes. 

2.  What  advantages  does  a  system  of  excise  taxes  offer  as  a  means 
of  raising  revenue  ?     How  are  excise  taxes  collected  ? 

3.  State  the  disadvantages  of  a  system  of  excise  taxes. 

4.  For  purposes  of  revenue  is  it  better  that  excise  and  customs 
taxes  should  be  levied  on  the  same  or  on  different  commodities  ? 

5.  Do  excise  taxes  discourage  home  industries  and  favor  the  foreign 
manufacturer  ? 

6.  For  the  purpose  of  revenue  should  excise  taxes  preferably  be 
imposed  on  necessities  or  on  luxuries  ?  What  is  the  practice  in  this 
respect  in  the  United  States?  Does  this  practice  conform  to  the 
principle  of  ability? 

7.  Are  excise  taxes  in  this  country  imposed  strictly  for  fiscal 


PUBLIC    FINANCE   AND    TAXATION  133 

purposes  ?     May  they  be  regarded  as  being  equivalent  to  sumptuary 
laws,  either  in  effect  or  by  intention  ? 

8.  Who  bears  the  burden  of  excise  taxes  ? 

iv.  Income  Taxes 

Questions 

1.  What  has  been  the  chief  obstacle  to  a  federal  income  tax  in 
the  United  States?  Has  this  obstacle  prevented  state  taxation  of 
income  ? 

2.  What  has  been  the  chief  obstacle  to  effectual  administration 
of  state  income  taxes  ?  Would  this  difficulty  have  the  same  force  in 
the  case  of  a  federal  income  tax  ? 

3.  What  is  taxation  of  income  at  the  source  ? 

4.  For  purposes  of  fiscal  administration  could  income  be  satis- 
factorily defined  ?  Does  the  definition  of  income  include  increase  in 
the  value  of  property  ?     Does  it  exclude  allowance  for  depreciation  ? 

5.  Should  income  taxes  be  progressive?  Should  incomes  below 
a  certain  amount  be  exempt  from  taxation  ? 

6.  Who  bears  the  burden  of  an  income  tax  ? 

7.  Are  income  taxes  in  harmony  with  the  princijile  of  ability? 
with  the  principle  of  benefit?  with  the  ])rinciple  of  equal  sacrifice? 

8.  Should  you  regard  an  income  tax  of  t,^^^  per  cent  as  excessive? 
Is  it  really  heavier  than  a  general  property  tax  of  20  mills  on  the 
dollar,  levied  on  a  4  per  cent  security  assessed  at  two-thirds  of  its 
market  value  ? 

v.  Inheritance  Taxes 

Questions 

1.  How  high  a  rate  should  you  approve  in  taxation  of  inheritances  ? 
Has  anyone  a  right  to  inherit  ?  to  unrestricted  inheritance  ? 

2.  Should  inheritance  taxes  be  ])rogressive  ?  If  so,  should  the 
progression  ])e  based  on  the  amount  of  the  estate,  the  amount  of 
the  s[)ecinc  inheritance,  the  amount  of  the  jirevious  ])r()i)erty  of  the 
heir,  or  the  degree  of  kinship  ? 

3.  What  inconveniences  result  from  the  separate  administration 
of  inheritance-tax  laws  by  the  se\eral  states? 

4.  Is  it  i)roper  to  tax  an  inheritance  in  more  than  one  state?  Is 
the  tax  in  practice  to  be  paid  in  the  state  of  the  testator,  of  the  bene- 
ficiary, of  the  location  of  the  ])roperty,  or  of  thi  trustee  under  the 
will  ? 

5.  Who  bears  the  burden  of  an  inhei'itancc  tax?  Is  the  burden 
according  to  benefit?  according  to  abiHty? 


134  OUTLINES   OF  ECONOMICS 

vi.  Corporation  and  Business  Taxes 

Questions 

1.  Who  really  pays  a  tax  levied  on  (o)  the  granting  of  a  corpora- 
tion charter  ?  {b)  the  property  of  a  corporation  ?  (c)  the  franchise 
privileges  of  a  public  service  corporation  ? 

2.  Is  the  value  of  a  franchise  an  unearned  increment?  Should 
the  total  income  attributable  to  the  special  privilege  of  the  franchise 
be  absorbed  by  taxation  ?     Would  such  taxation  be  confiscatory  ? 

3.  What  is  the  best  test  of  the  taxable  value  of  a  business  ? 

4.  Is  a  high-license  tax  on  saloons  a  desirable  form  of  taxation  ? 
Why  ?     Who  bears  the  burden  of  the  tax  ? 

c)  Tax  Reform 

Questions  ' 

1.  Distinguish  between  direct  and  indirect  taxes.  Is  the  distinc- 
tion of  importance  in  economics  ?  in  United  States  constitutional  law  ? 

2.  Of  the  several  forms  of  taxation  which  have  been  discussed, 
which,  in  this  country,  are  primarily  employed  (a)  by  the  federal 
government  ?    {b)  by  the  states  ?   (c)  by  local  governments  ?     Why  ? 

3.  Of  our  present  forms  of  taxation  which  are  likely  to  increase 
and  which  are  likely  to  decline  in  importance  with  the  progress  of 
scientific  reforms  ? 

4.  Is  the  need  of  government  revenues  increasing?  Will  taxa- 
tion in  the  future  be  depended  upon  for  larger  resources  than  at 
present  ?  Would  a  heavier  burden  of  taxation  furnish  an  incentive 
to  tax  reform  ? 

5.  Try  to  estimate  the  amount  of  indirect  tax  which  you  pay  in 
the  course  of  a  year.  If  people  in  general  realized  how  large  a  pro- 
portion of  their  total  expenditure  goes  for  taxes  would  the  problems 
of  tax  reform  receive  more  attention  ? 

6.  Is  the  benefit  theory  or  the  ability  theory  of  taxation  the  more 
acceptable  at  present  ?  Does  the  movement  toward  larger  functions 
of  government  indicate  a  growing  belief  in  one  of  these  theories  rather 
than  in  the  other  ?     If  so,  which  seems  to  be  gaining  ground  ? 

7.  Is  a  thoroughly  good  system  of  taxation  attainable  in  this 
country  without  amendment  of  the  Constitution  of  the  United  States  ? 
Do  you  anticipate  such  an  amendment  ? 


H.     SOCIAL  REFORM 

I.     Criticisms  of  the  Present  Industrial  Order 
11.     Remedies  Which  Have  Been  Suggested 
III.     Suggest-^d  Ideals  of  Distributive  Justice 


Up  to  this  point,  the  study  of  industrial  society  has  been  confined 
almost  entirely  to  a  study  of  things  as  they  are — to  an  analysis  of 
the  actual  structure  with  but  little  reference  to  proposed  changes. 
The  present  industrial  order  is  however  neither  final  nor  satisfactory. 
Its  defects  have  evoked  endless  criticism,  and  many  modifications  of 
the  existing  regime  have  been  suggested,  some  of  which  amount  to 
social  revolution.  These  criticisms  and  suggested  remedies  we  may 
now  consider  and  test  with  the  aid  of  the  principles  established  in 
o.ir  study  of  the  economic  situation  as  it  exists. 

The  outline  of  social  reform  which  follows  is  on  an  extremely 
limited  scale.  Only  so  much  is  attempted  as  shall  indicate  some  of 
the  directions  in  which  a  more  thorough  inciuiry  might  proceed. 
Questions  are  introduced,  as  elsewhere  throughout  the  book,  to 
develop  important  problems  for  investigation;  but  on  many  points  the 
analysis  hardly  goes  beyond  a  mere  schematic  statement  of  the  case. 

I.  Criticisms  of  the  Present  Industrial  Order 

1.  Economic  Defects 

a)  Defects  of  the  Productive  Process 

i.  Wastefulness  and  Duplication  of  Effort 
ii.  Artificial  Stimulation  of  Wants 
iii.  Production  for  Sale  Rather  Than  for  Service 
iv.  Carelessness  in  Conser\ing  Human  ICnergy 

b)  Defects  of  the  Distributive  Process 

i.  Great  Inecjualities  in  Possessions  and  Incomes 
ii.  The    Unfortunate    Situation    of    the    So-called    Lower 

Classes 
iii.    The  Consequences — unbalanced  social  development,  and 
probable  imi)airment  of  the  efficiency  of  production 

2.  Rcsultini^  Social  and  Political  Defects 

a)  C()rru[)ti()n,  Favoritism,  and  Inefticiency  in  Government 

b)  Militarism 

c)  Vice  and  Crime 

3.  Difficulty  (impossibility?)  of  Remedying  These  Evils  under  the 
Present  System 


136  OUTLINES   OF  ECONOMICS 

Questions 

1.  Mention  two  instances  which  illustrate  each  of  the  above- 
mentioned  defects  of  the  productive  process. 

2.  Is  non-competitive  enterprise  free  from  waste  and  duplication 
of  effort  ? 

3.  Is  wastefulness  an  advantage  in  competitive  industry?  Could 
it  be  maintained  that  the  stimulus  of  competition  prevents  waste 
more  than  it  causes  waste  ? 

4.  Which  is  the  greater  danger:  that  competitive  industry  -will 
stimulate  excessive  and  artificial  wants,  or  that  non-competitive 
conditions  will  result  in  neglect  to  provide  for  wants  already  felt  ? 

5.  Would  adulterated  goods  be  offered  for  sale  except  under  an 
individualistic  and  competitive  economic  regime  ? 

6.  How  do  you  distinguish  between  adulterated  or  spurious  goods 
and  cheap  substitutes  ?  Are  cheap  substitutes  desirable  ?  Does 
competition  favor  the  invention  and  production  of  such  goods  ? 

7.  The  investigators  of  the  Pittsburgh  Survey  found  that  industries 
in  the  Pittsburgh  district  had  resulted  in  526  deaths  from  accidents 
in  one  year.     Is  this  due  to  defects  of  the  present  industrial  system  ? 

8.  Cite  cases  where  fraud  has  been  one  of  the  forces  in  the  present 
distributive  process. 

9.  How  can  it  be  argued  that  defects  in  distribution  harm  pro- 
duction and  social  development  ? 

10.  Are  the  rich  growing  richer  and  the  poor  growing  poorer? 

11.  Is  the  control  of  wealth  ever  confused  with  the  ownership  of 
wealth  in  discussing  the  great  fortunes  of  today  ? 

12.  When  we  speak  of  the  economic  inequalities  of  today  do  we 
mean  inequalities  of  property  or  of  income  ? 

13.  Does  the  inducement  to  political  corruption  for  incU\idual 
advantage  exist  only  where  industrial  conditions  are  professedly 
individualistic  ? 

14.  With  what  justice  can  the  prevalent  social  and  political  defects 
be  charged  to  the  industrial  situation?  Does  the  mere  fact  that 
defects  exist  condemn  a  system  ?  Is  any  system  likely  to  be  free 
from  defects  ? 

15.  "There  can  be  no  real  political  democracy  without  industrial 
democracy."     What  does  this  mean  ? 

16.  Can  you  give  instances  of  wars  or  menace  of  war  due  to  (a) 
national  need  for  economic  expansion,  by  enlargement  of  territory 
or  increase  of  foreign  trade  ?  (b)  comm  ircial  aggression  of  individuals 
in  foreign  countries  ?  (c)  agitation  by  persons  who  would  be  pecuni- 
arily gainers  if  war  should  occur  ?  Which  of  these  cases  are  charge- 
able to  the  present  economic  system  ? 


SOCIAL   REFORM  137 

17.  Make  a  list  of  forms  of  vice  and  crime  which  are  fostered  by 
the  present  industrial  system,  and  show  their  relation  to  such  causes 
as  exhausting  conditions  of  work,  unemployment  and  want,  chronic 
poverty,  tenement  and  lodging-houses  conditions,  etc. 

18.  Judging  from  what  you  know  of  the  way  in  which  dexelopment 
of  any  kind  takes  place,  cloes  it  seem  to  you  likely  that  one  could 
reason  out  a  system  which  would  prove  more  efficient  in  production 
than  one  which  has  actually  developed  through  decades?  Do  you 
think  it  reasonal)le  to  expi'ct  any  sudden  change  in  the  characteristics 
of  the  factors  of  production  ? 

19.  Does  the  j)resent  system  seem  to  you  to  be  mainly  good  with 
some  defects,  or  mainly  bad  with  some  good  ])oints  ? 

20.  Make  out  a  list  of  the  good  points  of  the  present  system. 


II.  Remedies  Which  Have  Been  Suggested 

1.  Individual  Reform — the  Development  oj  DiJJcroU  Idcah 

2.  Social  Reform 


I.  Individual  Reform — the  Development  of  Different  Ideals 

a)  The  Significance  of  Individual  Reform 

b)  The  Agencies  of  Individual  Reform 

Questions 

1.  If  all  men  were  actuated  by  high  ideals  would  it  make  much 
difference  what  the  industrial  system  was?  Should  we  do  better 
to  bring  our  attempts  at  reform  to  l)ear  upon  tlie  indixidual,  or  ui)on 
the  system  ? 

2.  Mention  i)rofessions  whose  repre>entati\es  are  engaged  pri- 
marily in  reforming  individuals.  Mention  other  professions  whose 
representatives  are  engaged  iirimarily  in  reforming  the  social  system. 

3.  Do  you  think  that  indi\idual  reform  would  react  u])on  social 
reform?  Do  you  think  that  social  reform  would  react  upon  indi- 
vidual reform  ? 

4.  Should  you  e.\i)ect  right-minded  and  law-abiding  mi-n  and 
women  to  grow  up  in  the  streets  of  city  slums? 

5.  Which  is  the  more  jxTtinent  statement:  (<;)  that  men  and 
women  are  inelTicient  and  vicious  and  criminal  because  they  have 
been  born  and  have  grown  uj)  in  wretched  surroundings,  or  [lA  that 
the  cause  of  their  ha\ing  been  born  and  reared  under  sucli  conditions 
is  to  be  sought  in  the  fact  that  their  parents  and  predecessors  in 
general  were  imrticient,  \icious,  and  criminal? 


138  OUTLINES   OF  ECONOMICS 

6.  How  can  a  person  with  ideals  of  social  service  make  up  his 
mind  whether  he  should  engage  primarily  in  movements  making  for 
individual  reform  or  in  movements  making  directly  for  social  reform  ? 

2.  Social  Reform 

a)  Reforms  Involving  No  Vital  Change  in  the  Present  Order 

b)  Reforms  Practically  Amounting  to  Revolution 


a)  Reforms  Involving  No  Vital  Change  in  the  Present  Order 

i.  Reforms  of  the  Immediate  Conditions  of  Industry 
(i)  On  the  Initiative  of  the  Persons  to  Be  Benefited 
(o)  The  Trade  Union  Movement 
{b)  Co-operative  Enterprises 

(2)  On  the  Initiative  of  Other  Persons 
(o)  Profit-sharing 

(3)  On  the  Initiative  of  the  State 

(a)  Regulation  of  the  Conditions  of  Work 

{b)  Workingmen's  Insurance  and  Pensions 
ii.  General  Economic  and  Social  Reforms 
(i)  On  the  Initiative  of  Private  Persons 

{a)  Philanthropic  and  Charitable  Enterprises 
(2)  On  the  Initiative  of  the  State 

{a)  Direct  Aid  to  the  Needy — Poor-Relief 

{b)  Tax  Reforms — ^including  the  readjustment  of  the 
burden  of  government  expenditures  and  also  the  less 
radical  of  the  tax  reforms  designed  to  prevent  excessive 
concentration  of  wealth,  such  as  progressive  income 
and  inheritance  taxes 

(c)  Enlarged  Educational  Facilities 

{d)  Provisions  for  the  Public  Health — hospitals,  medical 
aid,  facilities  for  recreation,  housing  regulations 

Questions 

1.  What  functions,  apart  from  those  of  regulating  the  relations 
between  workmen  and  employees,  do  trade  unions  commonly 
perform  ? 

2.  Which  is  likely  to  have  greater  success,  producers'  co-operation 
or  consumers'  co-operation  (so-called)  ?     Why  ? 

3.  Cost  of  living  is  high.     Would  it  be  wise  for  a  certain  class  of 


SOCIAL    RKI'ORAI  139 

people  (say  college  teachers)  to  form  co-operative  societies  to  secure 
their  household  provisions  ?  What  factors  would  make  for  success 
in  such  a  venture?  What  factors  would  make  for  failure?  Would 
the  enterprise  be  apt  to  succeed  better  if  membership  were  confined 
to  one  class  of  society  ? 

4.  Is  there  any  element  of  co-operation  in  the  present  order? 
If  so,  of  what  kind  ? 

5.  Describe  several  forms  of  profit-sharing,  and  explain  their 
respective  advantages  and  defects. 

6.  Do  you  think  that  labor  unions  are  likely  to  look  with  favor 
upon  profit-sharing  ?     Why  ? 

7.  Do  you  expect  that  either  profit-sharing  or  co-operation  will 
become  general  in  the  United  States  ? 

8.  Is  there  more  cause  for  inspection,  regulation,  etc.,  in  industry 
than  there  was  150  years  ago?  Exactly  why?  Does  the  fact  of 
more  regulation  prove  that  we  are  drifting  into  socialism? 

9.  What  are  the  grounds  for  labor  legislation  protecting  women 
and  children  ?  Do  these  reasons  hold  ecjually  well  for  such  legisla- 
tion for  the  protection  of  men  ? 

10.  Why  is  it  more  difficult  to  get  suitable  factory  legislation  in 
the  United  States  than  in  England  ? 

11.  What  is  the  "sweating"  system?     What  arc  its  chief  evils? 

12.  In  what  industries  is  the  sweating  system  most  prevalent? 
How  can  its  evils  be  eliminated  ? 

13.  Name  five  trades  or  occupations  that  are  especially  dangerous 
to  workers.  Should  the  state  pass  special  legislation  to  ]irotcct 
the  workers  in  such  occupations  ? 

14.  What  is  meant  by  "employers'  liability''? 

15.  Should  the  burden  of  workingmen's  insurance  be  carried  by 
the  employer  or  by  the  state  ?     Why  ? 

16.  Wiiich  man  renders  the  greater  service,  the  soldier  in  the  army 
or  the  worker  in  industry?  Which  more  deserves  a  pension?  Do 
you  think  that  the  United  States  should  have  a  system  of  working- 
men's  insurance  against  sickness,  accident,  old  age,  and  death? 

17.  Suppose  that  sick  benefits,  old-age  i)ensions,  etc.  (if  provided 
for)  raise  tin-  prices  of  goods  to  the  consumer.  Do  you  think  this 
is  fair  to  the  consumer  who  does  not  receix'e  such  a  benefit  or  ])ension  ? 

18.  Shouhl  the  efforts  of  phihinlhropy  and  charity  be  directed 
more  toward  alleviation  or  toward  ])revention  of  misery? 

19.  Is  the  right  of  inheritance  a  natural,  inherent  right?  Is 
primogeniture?  Gi\e  arguments  for  and  against  the  right  of  inherit- 
ance.    Give  arguments  for  and  against  the  right  of  bequest. 


I40  OUTLINES   OF   ECONOMICS 

h)  Reforms  Practically  Amounting  to  Revolution 

i.  Land  Nationalization  (dealt  with  under  "Rent") 
ii.  Anarchism 
iii.  Communism 
iv.  Socialism 

(i)  The  SociaUst  Philosophy  as  Exemplified  in 
{a)  Utopian  Socialism 
{b)  Christian  Socialism 
(c)  State  Socialism 
{d)  Marxian  Socialism 

(i)  The  Materialistic  Conception  of  History 
(ii)  The  Marxian  Theory  of  Exploitation 
(iii)  The    Doctrine   of    Capitalistic    Contradictions — 
commercial  crises,  concentration  of  capital  and 
industry,  progressive  misery,  development  of  the 
proletariat 
(iv)  The  Class  Struggle  and  the  Social  Revolution 
(v)  The  Co-operative  Commonwealth 
(2)  The  Socialist  Movement 
(a)  The  Socialist  Program 

\b)  The  Organization  and  Extent  of  the  Movement 
(c)  The  Aids  and  Hindrances  to  the  Movement 

Questions 

1.  Carefully  distinguish  between  anarchism,  communism,  and 
socialism,  as  social  ideals. 

2.  Does  the  philosophical  anarchist  seek  primarily  an  economic 
reform  ?     Does  the  communist  ?  the  socialist  ? 

3.  Can  you  cite  cases  where  economic  conditions  appear  to  have 
determined  men's  views  on  morals,  poHtics,  philosophy,  religion,  etc.  ? 

4.  In  reality  do  you  think  that  economic  conditions  determine 
men's  views  or  that  men's  views  determine  their  economic  conditions  ? 

5.  To  what  extent  is  the  course  of  history  explained  by  economic 
causes  ?  Consider,  e.g.,  the  discovery  and  settlement  of  America,  and 
the  various  wars  in  the  history  of  the  United  States. 

6.  Do  political  parties  represent  the  economic  interests  of  con- 
tending groups  of  people  ? 

7.  Suppose  it  is  established  that  labor  is  exploited  by  the  employ- 
ing class.  Does  that  prove  the  right  of  the  laborer  to  the  total  prod- 
uct of  industry,  or  estabHsh  the  correctness  of  Marx's  analysis  of 
wages  ?     Might  there  be  any  possible  remedy  other  than  sociaHsm  ? 

8.  Is  there  a  class  struggle  in  the  United  States  today  ? 

9.  Is  there  a  growing  concentration  of  wealth  in  the  hands  of  the 


SOCIAL    RKI'ORM  141 

few?     If  so,  why  is  this  unfortunate?     Is  the  concentration  move- 
ment inevitable  in  all  industries  ?   If  it  is,  is  socialism  the  only  remedy  ? 

10.  Is  socialism  to  be  judged  by  its  ideal  or  by  its  probable  work- 
ings ?  Do  you  think  one  should  commit  himself  to  socialism  because 
its  ideals  are  high  ?     Are  the  ideals  of  the  competitive  system  lower? 

11.  Draw  up  a  list  of  difficulties  which  you  think  the  co-operative 
commonwealth  would  exj)ericnce. 

12.  Do  you  think  that  all  the  evils  of  today  are  due  to  any  one 
cause  ?     Do  you  think  there  is  any  one  cure  ? 

13.  Does  the  present  system  stand  committed  to  the  continuance 
of  present  evils  ? 

14.  Do  you  think  anyone  is  sufficiently  wise  to  predict  the  course 
of  human  development  for  the  next  hundred  years  ?  Should  you  take 
the  stand  that  any  set  program  for  the  future  is  unwise  ? 

15.  Do  you  think  it  possible  for  a  government  representing  the 
workers  to  take  over  one  great  industry  after  another  and  to  operate 
these  great  industries  for  the  common  welfare  rather  than  for  profits  ? 

16.  Suppose  socialism  were  realized.  What  would  be  the  effect 
upon  rent  ?  interest  ?  profits  ?  wages  ?  Would  there  be  anything 
corresponding  to  these  shares  ?  Would  the  underlying  facts  of  pro- 
duction be  altered  ? 

17.  Would  the  necessity  of  taking  industrial  risks  disappear  under 
socialism  ?  If  not,  who  would  be  the  risk-taker  ?  Would  risks  be 
taken  more  wisely  than  under  the  present  system  ? 

18.  Would  the  necessity  of  saving  disappear  under  socialism  ?  If 
not,  who  would  do  the  saving  and  how?  Would  it  be  done  more 
wisely  than  under  the  present  system  ? 

ig.  In  a  collectivist  state  would  the  worker  have  any  more  free- 
dom than  he  has  today? 

20.  It  has  been  said  that  progress  implies  the  elimination  of  the 
''mere  muscle  man."  Do  you  agree?  Is  his  case  becoming  steadily 
worse  under  the  present  system  ?  If  so,  would  socialism  continue 
that  tendency  ? 

21.  Does  the  socialist  urge  equal  distribution  of  wealth  ? 

22.  The  socialists  deny  they  would  ha\-e  a  "dead  level""  society. 
They  would  permit  inequalities  of  incomes  and  of  possessions.  Why 
should  they?  When  they  say  this  do  they  concede  the  usefulness  of 
many  of  the  motive  forces  of  the  present  order?  Do  thev  retain 
many  of  the  temptations  of  the  present  system  ? 

23.  If  socialism  were  given  a  practical  trial,  do  you  suppose  the 
result  would  be  found  free  from  the  evidences  of  greed,  unscrupulous 
personal  ambition,  fraud,  and  indolence  which  have  always  revealed 
themselves  in  other  forms  of  economic  society? 

24.  Would  such  defects  of  luinmn  character  be  as  detrimental  to 


142  OUTLINES   OF   ECONOMICS 

the  public  welfare  in  a  socialistic  system  as  they  are  when  associated 
with  excessive  individual  wealth  ? 

25.  The  plea  for  socialism,  it  is  said,  has  a  fallacious  persuasive- 
ness in  consequence  of  the  human  tendency  to  magnify  the  evils  of 
the  existing  situation,  and  to  assume  that  any  change  will  be  an 
improvement.  The  prejudice  against  socialism,  on  the  other  hand, 
is  aggravated  by  the  mental  inertia  which  resists  all  change.  Which 
of  these  biases  is  the  stronger  ?     Which  is  the  more  unreasonable  ? 

26.  When  a  man  contemptuously  dismisses  a  proposal  for  reform 
as  "socialistic"  what  does  he  ordinarily  mean? 

27.  Is  the  capitalist  in  a  position  to  form  an  unprejudiced  opinion 
on  socialism  ?     Is  the  laborer  ? 

28.  Are  the  men  who  vote  the  socialist  ticket  in  this  country  com- 
mitted to  any  definite  system  of  social  reorganization,  or  are  they 
opportunists,  taking  advantage  of  every  available  way  toward  reform  ? 

29.  What  are  the  main  planks  of  the  platform  of  the  socialist 
party  in  the  United  States  today  ?  Is  everyone  who  approves  of  any 
or  even  most  of  these  planks  a  socialist? 

30.  Draw  up  a  statement  of  the  forces  at  present  making  for 
socialism  in  the  United  States.  Draw  up  a  statement  of  the  forces 
militating  against  socialism. 

31.  Do  you  think  the  agitation  for  socialism,  by  counteracting 
the  extreme  tendencies  of  our  present  system,  will  lead  to  a  compro- 
mise which  will  be  better  than  either  ? 

32.  In  what  ways  do  you  think  a  socialist  state  would  be  superior 
to  the  present  competitive  regime  ? 

III.  Suggested  Ideals  of  Distributive  Justice 

1.  The  Aristocratic  I  deed:  Special  privileges  for  persons  of  special 
ability,  attainment,  or  position. 

2.  The  Communistic  Ideal:  Equal  division  of  all  goods,  or  division 
according  to  the  maxim:  "From  everyone  according  to  his 
ability:   to  everyone  according  to  his  needs." 

3.  The  Socialistic  Ideal:  To  everyone  according  to  his  labor- 
service  to  society. 

4.  The  Competitive  Ideal:  To  everyone  according  to  the  value  of 
his  services. 

The  above  brief  statement  of  the  several  ideals  of  distributive 
justice  is  designed  to  suggest  the  difference  of  viewpoints  rather  than 
to  ajford  an  adequate  description  of  each.  Communism  and  social- 
ism really  differ  not  so  much  in  ideals  as  in  the  social  mechanisms  by 
which  they  hope  to  reach  the  ideal  result.     The  stated  ideals  of  the 


SOCIAL   REFORM  143 

socialistic  and  competitive  systems  are  obviously  similar,  but  are 
to  be  distinguished  in  that  (a)  socialism  requires  some  governmental 
appraisal  of  labor-service,  while  competition  furnishes  at  least  a 
tangible  criterion  of  service  in  terms  oi  exchange- value;  (b)  essentially 
different  economic  programs  are  advocated  as  the  means  of  attain- 
ing them. 

Questions 

1.  Should  an  unjust  system  of  distribution  endure?  Is  it  likely 
to  do  so  ?     What  do  you  mean  by  unjust  ?  __1^ 

2.  Do  any  of  the  following  illustrate  the  aristocratic  theory: 
primogeniture,  right  of  inheritance,  ihe  closed  shop,  slavery  ? 

3.  What  advantages  might  be  claimed  for  an  aristocratic  economic 
system  in  the  earlier  stages  of  civilization  ? 

4.  Does  the  principle  of  the  survival  of  the  fittest  give  support  to 
the  aristocratic  theory  of  economic  society  ?  Assuming  that  human 
ability  is  largely  hereditary,  is  it  not  best  that  the  descendants  of  the 
wealthy  and  successful  should  be  given  superior  opportunities  ? 

5.  Are  all  men  equal?  If  so,  why  do  some  secure  exceptional 
advantages?  If  not,  why  attempt  a  social  system  which  assumes 
ec|uality  ? 

6.  Is  it  possible  to  reward  every  man  according  to  his  needs  ? 
How  can  the  needs  of  two  persons  be  compared?  Are  "needs" 
urgent  necessities  of  bare  existence,  or  economic  wants  in  general, 
or  aspirations  ? 

7.  Does  the  dictum  "From  each  according  to  his  al)ilily"  express 
a  right  of  the  incompetent  to  receive  aid  from  the  more  capable,  or 
an  ideal  of  altruistic  conduct  for  those  in  a  position  to  be  of  service  ? 

8.  If  the  weaklings  are  given  the  most  aid,  and  the  burden  of  aid- 
ing falls  most  heavily  on  the  able,  will  llu'  race  degenerate  through  a 
reversal  of  natural  selection  ? 

9.  Suppose  one  were  to  accept  the  ideal  "to  each  according  to  his 
labor."  Does  this  mean  physical  labor,  sacrifice,  labor-time,  or 
results  accomplished  ? 

10.  Does  not  the  }>resent  system  reward  according  to  the  signifi- 
cance a  service  possesses  for  jiartic  ular  in(li\iduals  and  small  classes? 
May  this  not  put  a  premium  upon  trivial  or  even  immoral  things? 
Would  it  be  better  to  let  a  government  bureau  adjudge  the  worth  of 
the  service?  How  is  this  bureau  to  arri\e  at  its  standards?  How  is 
it  to  a])ply  them  ? 

11.  "In  order  that  the  motive  of  self-interest  may  be  made  to 
serve  the  interests  of  society,  all  harmful  or  socially  uni)rontable 
ways  of  pursuing  self-interest  should  be  closed.  The  advantage 
of  individuals  will  then  depend  upon  the  measure  of  their  contribution 


144  OUTLINES   OF   ECONOMICS 

to  the  well-being  of  others."  Is  this  true?  Give  examples  of  the 
way  in  which  law  and  public  opinion  have  directed  competition  into 
beneficial  channels. 

12.  Advocates  of  the  competitive  system  have  more  or  less  ex- 
pressly assumed  (a)  that  every  individual  of  mature  age  and  sound 
mind  knows  his  own  interest  better  than  a  body  of  officials  can,  and 
(b)  that  each  individual,  if  left  to  himself,  will  pursue  his  own  interest. 
Criticize  these  assumptions.     To  what  extent  are  they  true  ? 

13.  Does  the  competitive  ideal  seem  to  you  harder  to  attain  than 
the  others?  Is  it  made  more  easily  attainable  by  the  fact  that  it 
utilizes  both  selfishness  and  unselfishness  ? 

14.  Do  you  see  any  difference  between  saying  that  things  ought 
to  be  thus  and  so  and  saying  that  the  state  should  at  once  proceed 
to  make  things  thus  and  so  ? 

15.  Which  is  more  important:  approximate  equality  of  possessions 
or  approximate  equality  of  opportunity?  Do  we  have  to  destroy 
the  present  order  to  secure  the  latter  ? 

16.  With  a  more  general  diffusion  of  knowledge,  culture,  publicity, 
etc.,  is  political  democracy  in  more  or  less  danger?  Is  equality  of 
opportunity  more  or  less  likely  to  ensue  ? 

17.  Do  you  think  that  the  indictments  of  the  present  order  by  men 
who  are  the  results  of  this  order  indicate  anything  as  to  the  possibility 
of  improvement  under  the  present  system  ? 

18.  What  real  difference  is  there  between  the  professed  ideal  of 
socialism  and  the  professed  ideal  of  the  competitive  system  ? 


,1 


UC  SOUTHERN  REGIONAL  UBRARY  FACIUTY 


AA    000  539  477    o 


WiVERSITY  OF  CALIFORNIA, 

LIBRARY,  ^ 


"S.  CALIF 


